Key Takeaways
- U.S. tech stocks sank in Q1 2025 amid high valuations, low-cost China AI, Fed fears and trade woes.
- Biggest tech ETF XLK has lost about 20.9% this year, erasing some valuation concerns.
- Three tech ETFs, KNCT, SOCL, and FDNI have fared better than XLK this year but still have cheaper valuations.
U.S. Tech stocks experienced a disaster in Q1 of 2025 due to a host of factors, including China’s DeepSeek innovating cheaper AI models, the rich valuation of U.S. tech stocks, the possibility of a less-dovish Fed, and ongoing trade tensions.
The tech-heavy Nasdaq 100 has suffered its worst quarter in nearly three years, slumping 8.3% amid growing fears of an artificial intelligence (AI) bubble. Already pressured by tariff uncertainties, government spending cuts and recession threats, the tech-heavy index witnessed fresh selling after warnings about a potential slowdown in AI-driven infrastructure investment.
Most AI Bellwethers Enter Bear Market or Correction Territory
Tech giants that once led the market’s rally have taken significant hits. These include NVIDIA Corp. (NVDA – Free Report) and Broadcom Inc. (AVGO – Free Report) — both down more than 25% from their recent highs. Other major players — including Apple (AAPL – Free Report) , Microsoft Corp. (MSFT – Free Report) , Amazon.com Inc. (AMZN – Free Report) , Alphabet Inc. (GOOG – Free Report) , and Meta Platforms Inc. (META – Free Report) — have also been deep in the red.
AI Investments Under Scrutiny
Tech companies have poured billions into data centers and AI chips to support the growth of AI models. However, concerns are mounting that the investment boom is outpacing demand. The DeepSeek threat made matters worse. Investors should note that DeepSeek, a Chinese startup developing AI models, grabbed headlines with the release of its new R1 model in late January.
According to Yahoo Finance, the company revealed that training the R1 model cost just $5.6 million, significantly less than the $100 million required to train OpenAI’s GPT-4 model. This raises important questions about AI investment and the potential rise of more cost-efficient AI agents, which could disrupt the current market dynamics.
The latest U.S.-China trade war hammered tech biggies like Apple, NVIDIA and Tesla, which have strong trade ties with China. Apple shares have plummeted 19% since the announcement of new tariffs last week, marking the company’s worst three-day performance since 2001.
Any Silver Lining Ahead?
Despite the uncertainty, Microsoft, Alphabet, Amazon and Meta remain committed to over $300 billion in capital expenditures for their current fiscal years. Despite the recent selloff, some analysts see buying opportunities.
The Nasdaq 100 has seen a decline in its price-to-earnings (P/E) ratio (trailing 12 months) in recent months. It was 41.24X in early September 2024, while it fell to 27.25X as of April 4, 2025.
Although valuation is still ripe as evident from the Nasdaq-100 index’s P/E of 24 times estimated profits, above the two-decade average of 20 times, as quoted on Bloomberg, valuation concerns have waned to some extent.
Cheap Tech ETFs in Focus
Below we highlight three tech-based exchange-traded funds (ETFs) that are available on sale. These ETFs beat the biggest tech ETF XLK (down 20.9% this year and 11% past year) as of April 7, 2025.The XLK ETF currently has a P/E ratio (36 months) of approximately 25.65X.
Invesco Next Gen Connectivity ETF (KNCT – Free Report) – Down 3.7% past year, down 14.6% this year
The underlying STOXX World AC NexGen Connectivity Index comprises companies with significant exposure to technologies or products that contribute to future connectivity through direct revenue. The ETF has a Zacks Rank #1 (Strong Buy) and a P/E (36 months) of 19.96X. KNCT yields 1.41% annually.
Global X Social Media ETF (SOCL – Free Report) – Down 3.4% past year, down 8.6% this year
The underlying Solactive Social Media Index is designed to reflect the performance of companies involved in the social media industry, including companies that provide social networking, file sharing, and other web-based media applications. The ETF has a Zacks Rank #2 (Buy) and a P/E of 14.41X. It has a meager dividend yield of 0.24% annually.
First Trust Dow Jones International Internet ETF (FDNI – Free Report) – Up 16.9% past year, down 0.9% this year
The underlying Dow Jones International Internet Index is a float-adjusted market capitalization weighted index designed to measure the performance of the 40 largest and most actively traded non-U.S. international companies in the Internet industry that are engaged in Internet commerce and Internet services.The ETF has a P/E of 23.72X. It has a dividend yield of 1.04% annually.
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