November 2, 2025
As the S&P 500 enters another pivotal earnings season, one sector holds the market’s fate in its hands: Technology. The Technology Select Sector SPDR (XLK)—up roughly 32% year-to-date and accounting for more than 32% of the S&P 500’s total market capitalization—has been the engine of U.S. equity performance. Yet as the earnings cycle approaches, investors must confront a familiar tension: how much of tech’s story is still driven by fundamentals, and how much by momentum and crowding?
XLK
The stakes are unusually high. The sector’s weighting in the S&P 500 is now comparable to its late-1990s peak, and its top holdings—Microsoft, Apple, NVIDIA, Broadcom, and TSMC (via ADRs)—have already re-rated to price near-perfect execution. The XLK’s forward P/E sits near 30× versus 22× for the broader S&P 500, roughly a one-standard-deviation premium above its five-year mean (source: MacroMicro, J.P. Morgan Asset Management). That means even modest earnings misses could trigger outsized index-level volatility.
Why the Bulls Stay Long
The reward case remains powerful. Consensus data compiled from FactSet, Zacks, and Refinitiv show Tech sector EPS growth expectations at +22% y/y—nearly four times the S&P 500 average. NVIDIA’s fiscal-Q3 revenue guidance of $54 billion ± 2% implies another record quarter, while Broadcom’s AI-driven networking business and its VMware integration are forecast to push FY 2025 revenue toward $63 billion. TSMC’s 2025 sales growth forecast of 20–25% and Palantir’s AI platform (AIP) revenue guidance of ~$3.75 billion reinforce the notion that the AI cycle remains in full gear.
NVDA
These numbers matter beyond individual names: NVIDIA, Broadcom, and TSMC together account for more than one-quarter of XLK’s implied earnings growth over the next year. If these firms deliver or beat expectations, the ETF could easily extend its leadership streak.
Fund flows are another tailwind. Morningstar reports that technology ETFs and mutual funds attracted $36 billion in net inflows YTD, while most other sectors suffered redemptions. State Street’s Sector & Industry Dashboard (Q3 2025) shows XLK received more fresh capital than any other sector ETF for the fifth straight quarter. That technical demand provides ballast, especially as institutional allocators rebalance into year-end.
Finally, the macro backdrop remains supportive. Inflation has cooled, the Fed is widely expected to deliver another rate cut in December, and long-duration assets—particularly high-margin growth companies—stand to benefit. Add in secular tailwinds from AI, cloud migration, and enterprise automation, and the fundamental bull case remains intact.
US 10YR Yield
Why the Bears Are Nervous
Yet valuation and concentration risks loom large. Tech’s dominance in the index—roughly one-third of S&P 500 market cap—means it no longer behaves as a satellite bet; it is the market. Hedge-fund positioning data from Goldman Sachs Prime Brokerage show exposure to mega-cap tech in the 97th percentile of the past decade, implying limited incremental buying power. If any of the marquee names disappoint, downside symmetry could reverse abruptly.
The fundamental risk centers on deceleration. Analysts expect NVIDIA’s data-center growth to slow sequentially by mid-2025 as hyper-scaler capacity digestion sets in. Super Micro Computer’s trimmed FY 2025 revenue outlook ($21.8–$22.6 billion, down from ~$24 billion prior) is an early warning that supply-chain timing and GPU availability are not frictionless. If order linearity remains choppy or margins compress under component cost inflation, that could ripple through the AI hardware ecosystem.
MU
China exposure and export restrictions remain another wildcard. Both NVIDIA and TSMC face evolving U.S. licensing scrutiny for advanced chips, while Reuters recently reported Micron’s partial halt on server-chip sales to Chinese data centers. Any additional constraints could undercut near-term shipments or margins, testing investor assumptions of infinite AI hardware demand.
TSMC
Finally, sentiment risk is palpable. With tech’s P/E premium stretched and the Mag 7-plus-PLTR/AVGO/NFLX cohort now representing over 35% of S&P 500 capitalization, even a modest guide-down could spark mechanical de-risking. A 5-10% correction in XLK would translate into several hundred basis points of drag on the index itself.
The Risk-Reward Equation
For investors benchmarked to the S&P 500, staying long XLK remains defensible but fraught. The upside is clear: sustained double-digit EPS growth, heavy fund inflows, and a macro environment biased toward rate cuts and growth-multiple expansion. The downside is equally visible: crowded positioning, peak valuation, and the risk that AI’s hyper-growth narrative faces its first cyclical test.
The prudent approach may be one of measured participation—holding a core XLK allocation to capture secular tech gains but offsetting with cyclical or defensive exposures (industrials, health care, or quality value) to temper volatility. In essence, the reward for staying long tech into earnings is continued market leadership; the risk is discovering that perfection was already priced in.
At ETFSector.com, our Elev8 model portfolio enters November long the VGT by 487 bp vs. the S&P 500’s Tech sector weight. We’ve balanced this position out by going tactically short (approx. -200 bps) XLY, XLC and XLF this month. We are long XLI, XLU, XLV and XLRE and the model is out of XLE, XLB and XLP this month. Despite risks of over-valuation and negative earnings surprise in the near-term, we see the AI backed momentum trade in Technology as the strongest motive force behind the bull market. The macro backdrop remains supportive of Growth and global demand for exposure continues to be strong.
Sources
- FactSet Research Systems – Earnings Insight: S&P 500 Q3 2025 Scorecard (Oct 2025)
- Zacks Research / Refinitiv I/B/E/S – Consensus forecasts for NVDA, AVGO, SMCI, PLTR, TSMC
- Morningstar – U.S. Sector Fund Flows Dashboard, 2025 YTD
- State Street Global Advisors – SPDR Sector and Industry Dashboard (Q3 2025)
- MacroMicro – S&P 500 Information Technology Forward P/E Ratio Tracker (2025)
- J.P. Morgan Asset Management – TMT Sector: Digging Into the Big Tech Rally (2025)
- Goldman Sachs Prime Brokerage – Hedge Fund Monitor (Oct 2025)
- Reuters – Micron Halts Some Server-Chip Sales to China (Oct 2025)
- Company filings and earnings releases: NVIDIA (Q2 FY’26), Broadcom (Q3 FY’25), SMCI (Q4 FY’25 guidance), Palantir (FY 2025 outlook), TSMC (Q2 2025 guidance)
Additional charts and data sourced from FactSet Research Systems inc.
