Morgan Stanley recently estimated that companies in the S&P 500 could cut $920 billion from their budgets by adopting “agentic” artificial intelligence (AI) software and robotics. Agentic AI is designed to work autonomously with minimal human interaction, making independent decisions, learning from its environment, and adapting to different conditions.
This projected savings of 28% of the index’s 2026 pretax earnings will likely benefit bottom lines and share prices, especially for tech companies supplying AI and those aggressively using it. However, there are concerns about the tech sector’s valuation.
Tech valuations have been climbing since 2012, with the S&P 500 information technology sector’s price-to-earnings (P/E) ratio currently at 38.01. This trend is partly driven by investors’ enthusiasm for AI innovations. While significant earnings growth in the tech sector is expected, overvaluation can lead to market corrections.
A similar scenario played out in 1999-2000 during the dot-com era, when tech stocks soared due to investor excitement about internet companies. However, this boom ended with a burst bubble, resulting in significant losses for investors. Recent analysis using Adam’s Green Zone Power Rating system found that the S&P 500 Tech ETF (XLK) has an average rating of “Bearish” 36 out of 100, indicating struggles for big tech stocks.
While there are still opportunities in the tech sector, investors should exercise caution and consider diversifying their portfolios. The days of ignoring risks in favor of high-growth tech stocks may be over.
Source: https://moneyandmarkets.com/what-to-make-of-sky-high-tech-valuations