What a comeback. The Nasdaq posted its worst quarter in three years in the first three months of 2025 on fears that a bubble was brewing in AI.
In the second quarter, tech outperformed all other sectors, returning 21.95% (after falling more than 12% in the first quarter) – with markets riding high on AI promises and no sign of the exuberance abating. Last week, Nvidia became the first company to hit a US$4 trillion market capitalisation.
So, is everything awesome in tech land again? Not quite. Below the surface excitement lies a complex mix of genuine progress and some red flags that investors should carefully monitor over the next six months.
Figure 1: Tech stocks outperformed all other sectors in the second quarter
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Source: Morningstar, as of 30 June 2025.
The optimism engine
We believe that the bull case for tech overall remains strong. We're witnessing unprecedented AI adoption, with 44% of companies now using AI solutions in some capacity - from experimental phases to serious implementation that have started replacing human jobs. This represents real return-on-investment proof points emerging across the market, moving beyond mere speculation to tangible business impact. From material adoption of Cursor AI for code writing to rapid “co-pilot” adoption from software vendors. The success of enterprise grade and consumer-friendly chatbots for research, coding, design, general search, and soon travel and shopping, show how the use cases keep stacking up.
For example, while Google has long been the dominant platform for information retrieval, the gradual decline in the percentage of ChatGPT users who also visit Google (Figure 2) suggests that generative AI is starting to fulfil some of the functions historically performed by search engines.
Figure 2: Share of ChatGPT users who also use Google
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Source: Similarweb, as at 3 July 2025.
AI-related companies now represent approximately 45% of total US market cap, climbing toward 60% when including private valuations. This concentration reflects genuine market confidence in AI's transformative potential, with hyperscalers exponentially increasing their AI infrastructure spending estimates and the momentum extending beyond traditional megacaps.
Robotaxi technology is rapidly maturing, with costs dropping to US$45,000 per car from US$100,000 and over last year and - cheaper than average EV car in developed markets today. The regulatory approval timeline for the driverless cars has compressed dramatically - from 34 months in San Francisco to just 16 months in Atlanta.
Consumer adoption rates are exceeding expectations, with services like Google’s Waymo quickly overtaking traditional ride-sharing company Lyft in San Francisco and making up 20% of rides through Uber in Austin, Texas, in the last week of March.
Meanwhile, in our view, the Chinese semiconductor supply chain remains an underappreciated investment opportunity with patent filings and dollar demand significantly outpacing current market capitalisations. We wrote in-depth about the opportunity here.
The warning signs
However, there are several red flags that demand attention. Meta's decision to partner with private equity firms to finance capital expenditure spending, while simultaneously offering US$100 million signing bonuses to AI talent, to us raises some concerning questions about return on investment calculations. When companies with substantial free cash flow seek external financing for AI projects, it signals uncertainty about these investments' profitability.
Companies like CoreWeave's valuation exemplifies market exuberance - trading at 25 times sales with an US$88 billion valuation on US$1.9 billion revenue and no profit.
That suggests a substantial positioning risk. With gross exposures at 100th percentile levels across prime brokerage books, the potential for forced deleveraging remains elevated.
What to look for in tech for the next six months?
We see three key trends dominating tech for the rest of the year.
Robotaxi proliferation is set to accelerate, but success depends heavily on regulatory navigation rather than technology or consumer acceptance. Stock selection becomes crucial as not all players will benefit equally.
Chinese semiconductor ascendancy will likely continue, creating both opportunities in Chinese supply chains and threats to established semicap equipment players.
AI services transformation is reshaping employment markets, with traditional IT jobs declining while AI-specific roles surge. This shift creates investment opportunities in selective IT services companies while threatening traditional business models.
The challenge ahead lies in distinguishing between genuine AI progress and speculative excess. While the technology's transformative potential remains real, valuations and positioning suggest the market may be ahead of fundamentals. Investors should remain selectively optimistic while preparing for potential volatility as reality tests meet market expectations.
Right now, to us, the semiconductor sub sector looks valued for perfection while software abd IT services continue to face an unending debate ranging from existential need to the future margin profile. Here selectivity is warranted – there are certainly some products and services that are staples and will potentially benefit by gaining/sustaining wallet share and others that are enjoying the valuation ride. Selective hunting is warranted.
Author: Sumant Wahi, a Portfolio Manager at Man Group.
Markets acting like it’s 2010
The current market environment bears a striking resemblance to the three historical stress periods of late 2010, 2012, and 2019, according to our macro model that examines past market regimes. While history doesn’t repeat, patterns often emerge that help us anticipate how current macro conditions might interact with political developments.
Today’s fragility stems from persistent policy uncertainty, driven by trade tensions and structural economic concerns. Despite bullish equity markets, cracks are evident in the foundations. A weakening US dollar and steepening yield curves reflect dynamics seen in late 2019, when the Federal Reserve intervened in repo markets while grappling with trade war disruptions.
In each of these historical stress periods, volatility followed a familiar cycle. Markets swung sharply between crisis-induced selloffs and policy-driven relief rallies. In 2010, the European debt crisis saw bailout announcements briefly calm markets before sovereign funding fears re-emerged. The fiscal cliff negotiations of 2012 created political theatre that drove sentiment, with equity markets reacting dramatically to each update. In 2019, trade war headlines combined with funding market stress, creating twin volatility sources despite supportive economic fundamentals.
In all three cases, markets ultimately required decisive policy intervention to break the cycle of uncertainty and restore sustainable risk appetite.
Style factors offer clues
Style factor performance during these crises offers valuable lessons for investors today. High-beta stocks consistently led recoveries as policy clarity emerged, with investors rotating from defensive positioning into cyclical exposures. Momentum factors experienced sharp reversals, with previously declining sectors driving market performance.
Following the fiscal cliff resolution in early 2013, small-cap and technology stocks surged as recession fears receded. Technology and industrials historically led recovery phases, benefiting from improved sentiment and risk appetites, while energy and materials outperformed as commodity prices rebounded.
Figure 3: High beta stocks lead recoveries
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Source: Man Numeric, using Barra factors as at 30 June 2025.
The consistent theme across all three episodes was that once policy uncertainty resolved, investors aggressively repositioned toward higher-risk, higher-reward assets, and created significant outperformance opportunities for beta and momentum strategies in the months that immediately followed crisis resolution.
Author: Valerie Xiang, a Portfolio Manager at Man Numeric.
All data Bloomberg unless otherwise stated.
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