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U.S. tech stocks are back in vogue after another stellar earnings season, but Morningstar analysis suggests the sector offers the best value to investors in years.
Market chatter in 2024 and 2025 frequently referenced fears of a “bubble” emerging in the top end of the U.S. equity market, as the “magnificent seven” reached increasingly lofty valuations largely thanks to hype surrounding artificial intelligence.
That peaked in October 2025, when the forward P/E ratio for the S&P 500 Information Technology sector reached over 30x, according to FactSet. But a succession of strong earnings seasons since then has allowed tech stocks to “grow into” their stock prices, by increasing the “E” denominator in the price-earnings equation, and thereby lowering the valuation multiple.
Morningstar research suggests the AI theme is now trading at its largest discount since 2019.
Using the researchers’ own price-to-fair-value metric, it marks a “fantastic entry point” in the sector, according to chief equity strategist Michael Field.
“AI isn’t a bubble that’s going to burst anytime soon – the underlying fundamentals are robust,” said Field.
“Demand for semiconductors is beating expectations and key drivers like data centers and infrastructure remain intact. The AI story has further to go, and investors should make the most of it while these opportunities still exist.”
U.S. tech stocks could offer their cheapest valuations in years
Morningstar’s research pointed to the U.S. equity market volatility of early 2026 as leading to a decline from record-high valuations among AI stocks, resulting in “more attractive pricing” for those most impacted.
Capital expenditure for 2026 was lifted among the “magnificent seven” in bumper April earnings updates, with their combined spend now tracking around $725 billion, versus previous expectations of roughly $670 billion, according to Saxo Bank.
Everything everywhere all at once
However, some analysts are skeptical about the ability of hyperscalers to maintain the current phenomenal capex figures into the future.
“We used to find it very difficult to believe that companies could grow at these rates and deliver these sorts of profits, and now we find it very difficult to believe that they won’t,” Dan Kemp, founder of investment consultancy Portfolio Thinking, told CNBC.
He said investors will require a “strong belief” to assume that companies can continue generating supranormal returns without being competed away, as is usually the case in capital markets.
Central to the thesis underpinning superior earnings growth is the idea that artificial intelligence is a ‘secular’ trend, and is therefore shielded from the peaks and troughs of the economic cycle.
This may well be true, according to BNP Paribas Asset Management portfolio manager Sophie Huynh, but physical constraints could pose a bigger problem to profits than the cycle itself.
“The pace of [AI] adoption could be unequal, as constraints could come from the total amount of tokens at disposal,” she added.
Tokens are basic units of processing that are bought by users of AI models that allow them to run tasks. Tech firms have increasingly rationed their usage as supply runs low.
Until then, tech remains the dominant theme in investor portfolios, and the sector is increasingly becoming “the answer to everything and everyone”, both a cyclical and defensive trade, as well as the driver of earnings growth, according to J.P Morgan Private Bank.
“When investors are excited about AI, they have bought tech,” wrote global investment strategist Kriti Gupta in a note on May 1.
“When they’re worried about inflation, they bought tech. When looking for outperformance, they bought tech. When thinking about sustainability, they bought tech. When they wanted to invest in growth, they bought tech. When they wanted to lean into the capex cycle, they bought tech. When worried about the world and in need of a company with a cash cushion, they bought tech.”