Technology Stock Outlook: Secular Tailwinds Continue, Says Morningstar
By Dan Romanoff, CPA — January 16, 2026
The technology sector demonstrated resilience and promising growth prospects despite early setbacks in 2025, according to Morningstar’s latest analysis. Following a sharp decline in the first quarter, tech stocks have staged a recovery, supported by enduring secular tailwinds in areas such as cloud computing, artificial intelligence (AI), and semiconductors.
Market Performance and Sector Trends
The first quarter of 2025 saw a notable collapse in technology stocks, triggered in part by changes in trade policies under the Trump administration, including aggressive tariff implementations. However, from April onward, the sector rebounded strongly. Hardware and semiconductor stocks have notably outperformed, while software stocks lagged behind, though recent data suggest software still holds considerable upside potential.
By the fourth quarter, technology was the second-best performing sector, rebounding from its poor showing earlier in the year. Over the trailing twelve months, the technology sector has outpaced the broader U.S. equity market by more than 800 basis points, underlining its robust recovery and growth trajectory.
Key Growth Drivers: AI, Cloud, and Semiconductors
Generative AI remains the dominant theme shaping the sector’s outlook. Software companies are actively integrating next-generation AI capabilities into their products, while cloud service providers are expanding offerings and bolstering infrastructure to support AI workloads. Semiconductor firms, including leaders like Nvidia, continue to benefit from surging demand for specialized AI and data center chips.
Despite widespread enthusiasm around AI, Morningstar notes the challenge of identifying attractive valuations within this dynamic market segment, as many AI-related stocks have exhibited significant price volatility throughout 2025. The Morningstar US Technology Index recorded a 21.43% gain over the past year, outperforming the broader U.S. equity market’s 17.35% increase. However, in the most recent quarter, the tech sector grew by a modest 0.73%, trailing the U.S. market’s 2.43% rise. Valuation analysis indicates that while hardware and semiconductor stocks are fairly valued, software stocks remain meaningfully undervalued, presenting potential investment opportunities.
Emerging Frontiers: Quantum Computing
Another frontier generating excitement is quantum computing. Expected to profoundly transform computational capabilities, quantum technologies could unlock new performance advantages over classical computers. Morningstar projects the quantum computing market could reach $200 billion annually at maturity, although this milestone is anticipated to be up to three decades away.
The growth path of quantum computing is expected to mirror early trajectories of cloud services like Amazon Web Services (AWS), with quantum computing ultimately being integrated into existing cloud platforms, rather than emerging as standalone products.
Morningstar’s Top Technology Sector Picks
Broadcom Inc. (AVGO)
Fair Value Estimate: $480 | Morningstar Rating: ★★★★ | Economic Moat: Wide | Uncertainty: High
Broadcom has achieved a leadership position in AI chipsets, providing customized processors to major clients such as Google. The company’s medium-term outlook remains strong as existing customers ramp up orders and it adds new clients, including AI pioneers Anthropic and OpenAI. Broadcom’s adept capital allocation and strong free cash flow generation across semiconductors and software solidify its standing as a top pick.
Microsoft Corp. (MSFT)
Fair Value Estimate: $600 | Morningstar Rating: ★★★★ | Economic Moat: Wide | Uncertainty: Medium
Microsoft continues to dominate productivity software markets with Office and Windows and solidifies its position as a public cloud leader via Azure. The firm’s initiatives in hybrid cloud environments and investments in OpenAI position it at the forefront of generative AI innovation, accelerating Azure’s growth. Microsoft’s diversified revenue streams, including Microsoft 365 E5 and the Power Platform, contribute to its promising long-term outlook.
NXP Semiconductors NV (NXPI)
Fair Value Estimate: $280 | Morningstar Rating: ★★★★ | Economic Moat: Wide | Uncertainty: High
NXP’s broad exposure to the automotive and industrial sectors, encompassing nearly 50% of its revenue from automotive, positions it well amid a cyclical recovery. The company’s portfolio spans processors, microcontrollers, and analog components, and it is poised to benefit from growth areas such as vehicle electrification, radar, and battery management systems. NXP’s integration with increasing semiconductor content per vehicle ties it closely to secular industry tailwinds.
Conclusion
Morningstar remains confident in the technology sector’s secular drivers, particularly in cloud computing, AI, and semiconductor demand. While hardware and semiconductor stocks are largely fairly valued, software stocks appear to offer significant upside potential for investors. Emerging technologies like quantum computing are also shaping the long-term landscape.
Investors looking for exposure to technology innovation may find compelling opportunities in diversified leaders such as Broadcom, Microsoft, and NXP Semiconductors.
Disclosure: The author does not hold positions in the securities mentioned in this article.
About the Author
Dan Romanoff, CPA, is a Senior Equity Analyst on Morningstar’s technology team.
For more insights and analysis on technology and other sectors, visit Morningstar.com.
