Chart of the week: back on track?

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Equity markets have come through a turbulent period this year, especially the US IT sector. The chart below shows the absolute performance of the sector (blue line) and its performance relative to the S&P (green line). From its high in December 2024, the sector dropped almost 30% by the start of April.

There were four main reasons behind this:

• The sector had performed strongly in 2024, pushing valuations up.

• The sector has a high beta i.e., it is very sensitive to general moves in equity markets.

• The Deepseek announcement in January putting continued investment in AI infrastructure in doubt.

• The impact of extreme levels of tariffs on complex supply chains.

Since then, the sector has recovered and is almost back to where it was at the end of 2024. Easing trade tensions and the resultant recovery in equity markets have been helpful. But fundamentals in the sector have also been improving. Strong earnings growth delivery brought the valuation down to more reasonable levels. The Deepseek announcement did not derail the capital investment in the AI space. Investment in data centres is expected to grow by 15-20% this year and the companies that led in the sector in past years remain the leaders in 2025.