The stock price change of technology companies is on pace for the second worst start to a year in the last decade. Sector investment fund returns are notably lagging their recent historical averages even as earnings expectations have so far held up. Additionally, momentum-based correlations have broken down and index-based dispersion has increased, signaling that 2025 thus far has been a stock pickers’ market.
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It has been a rough start for technology investors in 2025 as share prices have tumbled lower. Measured by the iShares Technology Select Sector Fund (XLK), technology stocks have posted a year-to-date return of -7.2% as of midday on March 6, 2025, according to FactSet data. This marks a sharp decline compared to the average return typically seen through March over the last decade. In fact, only 2022 – a year plagued by rapidly rising inflation – saw a worse return through the first week of March at -14%, as shown below. Investors may be left searching for a reason behind this drawdown, as recent earnings reports for many large technology companies resulted in little change to their earnings per share expectations.
The drawdown in technology stocks has shown little regard for relative momentum. The old adage that “past performance is no guarantee of future results” is proving true in this drawdown. If we plot 2025 stock returns for each XLK constituent against their respective 2024 return, there is little predictive value, as shown below. Momentum fiends would say that positive returns beget positive returns, and likewise for underperforming stocks, but 2025 returns have so far shown no correlation to 2024. If anything, the correlation appears slightly negative amidst a wide range of returns. If there ever was a time for a “stock pickers market”- one where individual company performance, rather than broad index trends, drive investment success – it looks like 2025 has so far been the year for it.
This breadth of returns, also known as dispersion, is appearing in broader market indicators and may not be a technology-specific story. Dispersion measures the range of returns observed within a broader market, and for the S&P 500, the index’s owner compiles monthly dispersion readings. The latest reading registered a 21-month high in annualized index dispersion. This level tells us that the range of returns amongst the index’s constituents are as wide as it was in the middle of 2023. That period saw a mini-banking crisis unfold alongside the early days of the AI-driven boom in technology stocks. These indicators suggest that 2025 has, so far, been both unpredictable and highly variable.
Technology stocks have tumbled to begin 2025. Sector-based ETF returns are significantly underperforming recent averages. This price weakness comes despite relatively muted earnings revisions at the company level and may be leaving index-based investors searching for answers. Additionally, momentum-based correlations are also showing little predictive value when assessing 2025 returns so far. This phenomenon of low correlation and a wide range of outcomes, known as dispersion, is not just a technology-specific story either. The S&P 500 dispersion index has hit multi-year highs, signaling that individual stocks are increasingly moving independently of the broader market. 2025 may be shaping up to be a stock pickers’ delight.
For more content by Blake Anderson, CFA®, Associate Portfolio Manager click here.
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