CONTRIBUTORS
Matt Cioppa, CFA
Portfolio Manager, Research Analyst
Franklin Equity
Key takeaways:
- While tech earnings growth outpaced the broader market roughly fourfold in 2025, signs that typically signal a “bubble” are conspicuously absent.
- Given artificial intelligence (AI) evolution and increased adoption, the robust innovation pipeline and valuations support in the sector, we think tech has strong potential to outpace the market again in 2026.
- We anticipate AI can continue to drive a multi-year super-cycle, creating a broad opportunity set spanning multiple markets.
We think tech can continue to deliver in 2026
Despite some volatility along the way, tech delivered another strong year in 2025.1 As in prior years, strong earnings growth underpinned this performance. In fact, tech and communication services earnings per share (EPS) growth was roughly four times higher than the rest of the S&P 500,2 fueled by AI investments. This has left some investors questioning if tech’s momentum is sustainable, and some fearing an AI-driven “bubble.”
We take a more nuanced view. In this paper, we believe the technology sector can continue to outperform in 2026, supported by three factors.
- AI evolution: The focus will shift from rapid adoption to value creation, which should ease bubble concerns.
- Innovation pipeline: We expect progress in digital labor, agentic commerce, physical AI, blockchain and stablecoins, quantum computing and more.
- Valuation support: Robust earnings growth should reduce reliance on multiple expansion.
Today’s tech cycle is built on real earnings power, making the 2026 outlook both durable and attractive. We expect tech to continue to lead in earnings growth in 2026, with that growth priced at a slight discount: the IT index trades at a 1.9x price-earnings-to-growth ratio versus 2.2x for the broader market.3
Acceptable growth-adjusted valuation, along with our confidence that we’re in the midst of a multi-year AI super-cycle, keep us optimistic on the technology sector in 2026.
Endnotes
1. Source: FactSet. Year to date to December 12, 2025.
2. Source: Franklin Templeton. As of December 12, 2025.
3. Source: Bloomberg. As of December 12, 2025.
WHAT ARE THE RISKS?
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Equity securities are subject to price fluctuation and possible loss of principal.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in the health care, information technology (IT) and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
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