The year just ending delivered another blowout return for technology stocks as investors and megacap companies themselves poured billions into artificial intelligence, driving market favorites to new heights. The Magnificent Seven stocks led by Nvidia dominated the investment landscape, as they did in 2023, sending broad market indexes to record after record. Nvidia, the dominant maker of AI semiconductors, won a coveted spot in the Dow Jones Industrial Average late this year, and all but Microsoft outperformed the benchmark S & P 500 index, which soared 27% in 2024 while the Nasdaq Composite jumped 34%. Looking ahead, many Wall Street analysts and portfolio managers expect technology’s strong performance to continue in 2025, but also anticipate a broadening out across the sector and the AI narrative. “This year was clearly the year of AI, with Nvidia paving the way from a trend and theme standpoint,” said AXS Investments CEO Greg Bassuk. “2025 is what we’re referring to more as the AI adjacent sectors. Next year is really going to be the year of this move from hardware to software.” More than two years after the Nov. 2022 debut of ChatGPT, the AI chatbot that answers questions by using natural language to generate human-like text , investor attention remains fixed on how AI is being used today as well as future applications. That enthusiasm is expected to extend into a third year in 2025. .IXIC YTD mountain Tech-heavy Nasdaq year to date But the path is unclear. Heading into the new year, tech stocks face a new White House administration in a little more than three weeks, and a Federal Reserve that’s embarked on a more sluggish policy of lower interest rates after the most aggressive tightening period in a generation. And while stocks rallied in the wake of President-elect Donald Trump’s victory last month, campaign promises to enact tariffs to protect American business could disrupt closely-connected international supply chains. Tariff threat The potential for increased tariffs in the new year creates uncertainty for the technology sector, especially semiconductors dependent on parts from Taiwan and other countries. “The good news is within the last decade you’ve seen companies taking pretty significant actions to ensure that there is diversification in their supply chains,” said Scott Kessler, head of tech, media and telecom at global researcher Third Bridge. Higher tariffs “could be perceived as a risk, but people aren’t sure what’s going to be proposed, what’s going to be implemented, and how long we’re going to see those things in effect.” Even under the outgoing administration, companies have faced limits on their business. Last year, for example, the Biden administration imposed new curbs , barring some advanced Nvidia semiconductors from sale in China out of fear they could be used by the military. Taiwan, too, may also be slapped with tariffs under a Trump administration, with the president-elect saying on a podcast in October that the island nation has stolen U.S. chip business . To be sure, tariffs might cut both ways and prove a potential boon for U.S. companies by reducing overseas competition, said David Miller, chief investment officer at Catalyst Funds. The tariff threat may also simply serve as a negotiating tactic to improve trade relationships, he said. “We’ve already had a falling out with China, but if it gets to the point that it was with Russia, we’re going to be in a really bad spot,” Miller said. AI and Nvidia evolution Many on Wall Street view 2025 as the year the AI story broadens out beyond a handful of infrastructure builders and megacap leaders. For more than two years, companies have touted potential use cases for AI, but few have actually brought any projects to market. Notable exceptions include Apple recently launching its Apple Intelligence AI initiative and Microsoft introducing its Copilot assistant. Many smaller companies, however, have failed to meet similar goals. “There’s a reason they call these companies ‘The Magnificent Seven,'” Miller said. “They’re in monopolistic positions in their industries, and I don’t think there’s anything fundamentally standing in their way.” One of the biggest questions in 2025 is what happens to AI leader Nvidia after another year of scorching market appreciation and record-setting earnings. NVDA YTD mountain Nvidia shares this year Shares of the AI chip darling have soared more than 180% this year after climbing 239% in 2023. The stock also split 10-for-1 in June and joined the Dow in November. “It has been absolutely insane,” said Angelo Zino, an analyst at CFRA Research. “If you look at just the data center business over the last eight quarters, it’s essentially up north of seven-fold. You’re not going to see anywhere near those types of growth rates” in the future. He views Nvidia’s graphics processing unit technology conference early next year and the Blackwell chip rollout as potential catalysts for the stock, but notes that 2025’s gain may not match the past two years. Baird’s technology desk sector strategist Ted Mortonson said that Nvidia’s product upgrade cycle is likely to fuel some volatility in the shares as Jensen Huang’s company works through transition kinks. Given this, he expects the second half to bode better for the stock than the early part of the year. Software — the next AI frontier Investors also view software as an area that’s rife with opportunity in 2025 as the AI buildout reaches the use case stage. The sector diverged in 2024, with companies such as Palantir surging to new highs as others languished. GoDaddy and Oracle — on pace for its best year since 1999 — joined Palantir in handily outperforming the S & P 500, while former highflier Adobe slumped 25%. ORCL ALL mountain Oracle heads for best year since 1999 Kayne Anderson Rudnick’s Julie Biel pointed to vertical software companies as one of the areas of opportunities in 2025, given their domain expertise with specific data sets. “Should we see more generative AI start to infiltrate the corporate world, those are the types of companies that are better positioned from a profitability standpoint, and are going to be better protected if we see a lot of disruption,” said the chief market strategist. Among the vertical software names are government software provider Tyler Technologies and infrastructure firm Bentley Systems , Biel said. Bassuk at AXS Investments focused on Workday given its human resources and financial software partnerships with top-tier companies, culminating in its elevation to the S & P 500 last week. Some companies have already begun gaining leverage by monetizing AI, according to Mortonson at Baird. They include ServiceNow , HubSpot and Palantir — the latter having more than quadrupled in value this year, soaring 378% and leading the S & P 500. APP YTD mountain AppLovin shares in 2024 Mortonson also highlighted MongoDB , AppLovin and Snowflake as potential beneficiaries of AI investment in 2025. AppLovin has already shot up 770% this year, bringing its market value to $123 billion. The company should benefit as it shifts from gaming to broader digital advertising, the sector strategist said. CFRA’s Zino views Microsoft in a good position after its relative underperformance since the pullback in technology stocks this summer. He also favors Salesforce and Adobe, the latter as a potential turnaround after this year’s struggle. “The valuation of that name has gotten depressed relative to the rest of the software space,” Zino said of Adobe. “If they can show some signs of AI monetization, that’s a name that could work.”
