Technology: Stocks Surged During the Second Quarter

Starting near the end of March 2026, tech stocks began to surge, as strength in semis and hardware continued and the software selloff eased. Our confidence in secular tailwinds, such as cloud computing, artificial intelligence, and the long-term expansion of semiconductor demand, remains unchanged. After months of poor performance, we see software as offering the most upside within the tech sector, although investor enthusiasm for the group is hard to find. We think momentum factors alone have pulled investment dollars from software toward semis and hardware.

Artificial intelligence remains the largest theme within the tech sector. Software firms are incorporating AI capabilities within their platforms, while cloud providers are introducing new services and ramping capacity, and many semiconductor firms are enjoying surging demand for AI and data center chip applications. Volatility has definitely been a hallmark of recent trading activity around this theme. The Morningstar US Technology Index is up 51% on a trailing 12-month basis, while the US equity market is up 27%.

The median US technology stock is undervalued, with a narrow margin of safety. Overall, we see hardware and semis as slightly overvalued and software as undervalued, given the fears surrounding AI. We believe we are in the early stages of AI adoption, and we see pockets of attractive value even within industries like semiconductors, where the median stock skews slightly overvalued.

There is an ongoing debate in the market about the penetration of custom ASICs, or XPUs, relative to Nvidia’s GPUs. We see these solutions as complements in large AI providers and are bullish about share gains and rapid growth for XPUs, which remain early in their deployment. While we expect Nvidia to remain the leader in AI chips more broadly, the ongoing shortage of AI compute, coupled with the natural evolution of specialized chips, means the market needs more options. We forecast 65% annualized growth for the XPU market over the next five years, reaching $240 billion in 2030. We expect 25% of total AI compute share for XPUs in 2030, up from just 10% in 2025.

Top Technology Sector Picks

Broadcom AVGO

• Fair Value Estimate: $650.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Broadcom is one of our top picks in semis, with a robust AI growth opportunity via its custom AI compute chips. We expect phenomenal growth in these chips in the medium-term, including a tripling in revenues in fiscal 2026 and doubling in fiscal 2027 thereafter. To us, the market is overly bearish on the long-term growth of these AI chips, and bearish on their impact on margins, where we see them as operating margin-accretive

Microsoft MSFT

• Fair Value Estimate: $600.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Wide-moat Microsoft is one of our top picks in software. The company dominates several of its served markets, such as with Office in productivity software and Windows for PC operating systems, and it has established itself as one of two clear leaders in public cloud. We think the proliferation of hybrid cloud environments will continue to strengthen Microsoft’s position with Azure. Further, the firm’s general leadership position in AI has driven an acceleration of Azure growth in recent quarters. Our growth estimates are centered around Azure, Microsoft 365 E5 migration, traction with the Power Platform for long-term value creation, and proliferation of AI.

Nvidia NVDA

• Fair Value Estimate: $280.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High

Our $280 fair value estimate is underpinned by strong growth for Nvidia’s AI GPU-based systems in both 2026 and 2027, and we see few signs from large customers to suggest that the global AI infrastructure buildout will slow down in any meaningful way. For 2028 and beyond, we think the strength of the firm’s software ecosystem (Cuda), chip design expertise, networking and interconnectivity capability, and the flexibility and programmability offered by all this gear will keep Nvidia at the center of the AI ecosystem. All the while, Nvidia should retain healthy pricing power and maintain 70%-plus gross margins.