Why technology stocks are projected to outpace defensives through 2027 - and whether they present a buying opportunity for investors.

Technology stocks are back in charge after a rocky start to the year - a comeback that feels all too familiar as investors hope to keep April's market slide firmly in the rearview mirror.

After falling out of favor in the first four months of 2025, the so-called Magnificent Seven group of megacap tech companies has fueled the stock market's May recovery from the sharp selloff seen last month, after President Donald Trump announced aggressive and far-reaching trade tariffs on April 2.

Investors are now wondering what it will take for tech stocks to maintain their leadership for the rest of the year - and how to position their portfolios should volatility return to U.S. financial markets.

The Roundhill Magnificent Seven ETF MAGS, which offers equal-weight exposure to the seven megacap companies - NVIDIA, Apple, Google parent Alphabet, Meta Platforms, Inc., Microsoft, Amazon.com and Tesla Motors - has risen 18.2% since its recent low on April 8, according to FactSet data.

"Those oversold conditions in April led investors back into some of the previous market leaders amid potential de-escalation in trade tensions, and the fact that the U.S. economy may avoid falling into a recession," said Anthony Saglimbene, chief market strategist at Ameriprise.

Strong first-quarter earnings for tech companies also helped the Magnificent Seven rally off their April lows and drew investors back to megacap names, defying market concerns about the durability of the artificial-intelligence theme and the long-term profitability of these companies, Saglimbene told MarketWatch in a phone interview.

Slightly less aggressive valuations for Big Tech have also lured investors back in. The forward price-to-earnings (P/E) multiple of the Roundhill Magnificent Seven ETF fell to around 23 on April 8, from about 30 earlier this year. It was the lowest level since the fund's inception in April 2023, according to Dow Jones Market Data.

Big Tech still lagging this year

While the rebound in the Magnificent Seven over the past two weeks offered some relief for retail investors aggressively buying the dip in the stock market, it was not enough to boost their year-to-date performance. The tech-related sectors of the S&P 500 SPX have still underperformed both the broader large-cap index and its defensive sectors so far this year, signaling a degree of hesitancy among investors about pushing tech stocks back into the stratosphere.

In another cautious signal, the S&P 500's consumer-discretionary sector has slumped 11.7% so far in 2025, while the information-technology and communication-services sectors were off 8.2% and 4.5%, respecitvely, in the same period, according to FactSet data.

At the other end of the spectrum, shares of utilities and consumer-staples companies - the market's traditional defensive sectors - have stood out among the best stock-market performers in the early months of 2025. The S&P 500's utilities sector has popped 5.8% so far this year, while the consumer-staples sector has risen 4.4% in the same period, according to FactSet.

Bet on Big Tech or stick with a defensive approach?

To be sure, investors were on the hunt for ways to play defense in the early months of 2025, as concerns over economic growth and President Trump's tariff plans put Wall Street on edge.

But now, strong earnings from technology companies have left many torn between betting on a further tech rally or sticking with a defensive approach.

First-quarter earnings results have highlighted a widening dispersion in earnings growth between Big Tech and nontech companies, according to Barclays.

Megacap technology firms beat annual earning-per-share growth estimates by 8% in the first three months of 2025, while nontech earnings fell short of forecasts in the same period, a team of Barclays strategists led by Venu Krishna said in a Thursday client note.

SOURCE: BLOOMBERG, DATA AS OF APRIL 29

Earnings expectations are also favorable for technology names: Cyclical stocks are projected to outpace defensives through 2027, according to Janus Henderson Investors (see table above).

To be sure, another reason why megacap tech companies came under pressure this year - aside from tariffs that could punish international sales - was concerns about potential overspending by U.S. companies on AI infrastructure after China's release of the DeepSeek platform.

"First-quarter earnings trends showed resilience in cyclical sectors like technology and communication services, while estimates in defensive areas of the market like utilities and food producers saw flat to lower forecasts," said Jeremiah Buckley, portfolio manager at Janus Henderson.

However, some strategists caution against drawing direct parallels between the performance of the Magnificent Seven and defensive stocks, because they appeal to different types of investors for different reasons.

Stocks in the utilities, consumer-staples and healthcare sectors are often considered defensive since these companies tend to operate in less cyclical industries, making them less sensitive to economic downturns - and thus helping investors to hedge portfolio risks.

"You're not getting the same level of earnings growth [each quarter for defensive stocks], but if there is an escalating trade war or a recession, these companies should do well ... so you're paying for defense," Mike Cornacchioli, senior vice president for investment strategy at Citizens Private Wealth, told MarketWatch via phone.

That puts this weekend's U.S.-China trade talks in focus as the next major event for investors, even though the stock market is closed over the weekend. Officials from the world's two largest economies are set to meet in Geneva, Switzerland on Saturday, as Washington and Beijing seek to navigate a path forward amid a bruising trade fight.

U.S. stocks finished the week lower on Friday. The Dow Jones Industrial Average DJIA lost nearly 0.2% this week, while the S&P 500 was off 0.5% and the Nasdaq Composite COMP dipped 0.3% over the same period, according to FactSet data.