Enthusiasm surrounding artificial intelligence (AI) is overshadowing broader struggles across the technology sector, with many companies still grappling with the slowdown that began in 2022, according to investors and recent financial reports.
Large tech firms like Nvidia and Microsoft have seen significant share price gains as early beneficiaries of AI, helping to erase memories of a rough 2022 when the tech-heavy Nasdaq Composite plunged nearly 30%. However, many tech businesses outside the AI space are finding it difficult to regain momentum.
“When you look at technology outside of AI, there’s not much happening,” said Tony Kim, head of technology investing at BlackRock’s fundamental equities division. “Many subsectors are still in a recession. The only real area of growth has been AI.”
Traditional tech sectors such as software, IT consulting, and electronics production for industries like manufacturing and automotive have been hit by weak demand and lingering issues from overexpansion and inventory buildup during the pandemic. Some companies have also felt the impact of AI growth, as customers with limited budgets shift their investments toward AI solutions.
Dustin Moskovitz, CEO of Asana and co-founder of Facebook, recently summed up the situation for many companies as his software firm reduced its forecasts for the remainder of the year. “We’re still seeing the unwinding of over-hiring and overspending from the early pandemic period,” Moskovitz explained. “This is coupled with massive uncertainty in the economic environment and how AI will ultimately play out.”
Recent financial reports show slower growth across most large tech companies, while many smaller firms are actively shrinking. According to Bloomberg data, companies in the S&P 500 IT sub-index grew their revenues by an average of 6.9% over the past 12 months, compared to a five-year average of 10%. Around 75% of these companies are growing more slowly than their recent historical average. Meanwhile, earnings per share increased by 16% over the past year, down from a five-year average of 21%.
The weakness is even more pronounced in smaller companies. In the Russell 2000, technology was the second-worst performing sector in terms of revenue growth during the second quarter, with a 6.1% year-on-year decline in revenue and a 2.8% drop in profits, according to LSEG data.
“Generative AI is masking a cyclical downturn in many other core tech sectors,” said Ted Mortonson, a tech strategist at RW Baird. “Everyone is hoping things improve in the next few quarters, but hope is not a strategy.”
Even within AI-driven subsectors like semiconductors, some businesses are facing challenges. Brice Hill, CFO of Applied Materials, a major chip equipment supplier, noted strong demand for AI and data center computing but pointed to "pockets of weakness in the auto and industrial end-markets."
John Barr, portfolio manager at Needham Funds, added, “Across industrial sectors, the story is similar. Current growth isn’t great, so we’re looking for companies with stable businesses that are also investing in new opportunities.”
Investor excitement around AI stocks has cooled since early summer, with many analysts forecasting a shift in attention away from Big Tech and toward sectors like financial services and industrials. Some tech investors are also hoping for a rotation within the tech industry itself—from the AI giants to more undervalued areas of the sector.
While few companies are expecting the type of explosive growth Nvidia has reported, some of the worst-hit areas of the tech sector are showing signs of stabilization. “I think we’re seeing things stop getting worse in the more macro-sensitive areas, and if interest rates decline, that will help,” said Tony Wang, portfolio manager at T. Rowe Price’s science and technology fund.
“The idea that AI is the only thing working has been true for the last two years. But I’m not sure that will remain the case going forward.”
