Q1 2025: U.S. Tech Stocks Suffer Major Decline Amid Industry Shifts

In the first quarter of 2025, U.S. tech stocks faced significant challenges primarily due to various factors, including China’s DeepSeek releasing more affordable AI models, high valuations in the U.S. tech sector, potential shifts from the Federal Reserve, and persistent trade tensions.

The Nasdaq 100 index, known for its tech-heavy composition, recorded its worst quarter in nearly three years, falling 8.3%. This decline stems from escalating concerns about an artificial intelligence (AI) bubble. Compounded by uncertainty over tariffs, government spending cuts, and economic recession risks, fresh selling occurred following alerts regarding potential slowdowns in AI infrastructure investments.

Key AI Stocks Enter Bear Market or Correction

Several major tech companies that previously led market gains have experienced sharp declines. Notable stocks, including NVIDIA Corp. (NVDA) and Broadcom Inc. (AVGO), dropped over 25% from their recent peaks. Other significant players like Apple (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG), and Meta Platforms Inc. (META) have similarly shown considerable losses.

Investment in AI Faces Increased Skepticism

Tech firms have invested billions in data centers and AI chip production to advance AI development. However, there is growing concern that this investment surge exceeds market demand. The situation has worsened due to competition from DeepSeek, a Chinese startup that made headlines by unveiling its new R1 AI model, which was trained at a mere $5.6 million—far lower than the $100 million needed for OpenAI’s GPT-4 model.

The implications of this cost-efficient approach raise critical questions about future AI investments and may shift market dynamics significantly. The recently escalating U.S.-China trade war has also impacted major tech corporations, including Apple, NVIDIA, and Tesla, all of which depend heavily on trade with China. Apple shares have seen a 19% decline since new tariffs were announced last week, marking its worst three-day performance since 2001.

Possibility of Recovery?

In spite of the current uncertainty, tech giants such as Microsoft, Alphabet, Amazon, and Meta remain committed to investing over $300 billion in capital expenditures this fiscal year. Analysts suggest that amidst the selloff, certain opportunities for investment may still exist.

The Nasdaq 100 has seen a decrease in its price-to-earnings (P/E) ratio, dropping from 41.24X in early September 2024 to 27.25X as of April 4, 2025. Despite still being higher than the two-decade average of 20 times, valuation concerns have moderated, as indicated by Bloomberg.

Attention on Affordable Tech ETFs

This section highlights three tech exchange-traded funds (ETFs) currently available at favorable valuations. Each fund is outperforming the largest tech ETF, XLK, which is down 20.9% this year and 11% over the past year as of April 7, 2025. The XLK ETF’s P/E ratio (36 months) stands at roughly 25.65X.

Invesco Next Gen Connectivity ETF (KNCT) – Down 3.7% over the past year and 14.6% this year. This ETF targets companies poised to benefit from advancements in connectivity technology. It boasts a Zacks Rank of #1 (Strong Buy) and a P/E of 19.96X. Furthermore, it offers an annual yield of 1.41%.

Global X Social Media ETF (SOCL) – Down 3.4% over the past year and 8.6% this year. This fund reflects the performance of companies in the social media sector. With a Zacks Rank of #2 (Buy) and a P/E of 14.41X, it delivers a modest dividend yield of 0.24% annually.

First Trust Dow Jones International Internet ETF (FDNI) – Up 16.9% over the past year and down 0.9% this year. This ETF targets the largest and most actively traded non-U.S. internet companies. Its P/E stands at 23.72X, and it offers a dividend yield of 1.04% annually.

Stay Informed with Our Free ETF Newsletter

Zacks’ free Fund Newsletter provides insightful news and analysis on top-performing ETFs every week. Get it without cost >>

Looking for the latest recommendations from Zacks Investment Research? Download the “7 Best Stocks for the Next 30 Days” report today for free. Click here.

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research

The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.