This article was originally produced in conjunction with Boring Money for their Insights.
Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved makes any express or implied warranties or representations.
After two years of blockbuster gains, the tech sector hit turbulence in the first half of 2025. From the shock arrival of Chinese AI challenger DeepSeek to President Trump’s sweeping tariffs on Chinese imports, investors were reminded just how quickly sentiment can swing in this fast-moving market. For investors, the challenge now is separating short-term noise from enduring opportunities – and working out how to navigate the sector’s next phase.
Looking back on H1: A rough ride for tech
The first half of 2025 has reminded investors that technology stocks rarely move in a straight line. After the blockbuster rally of 2023 and 2024, valuations entered the year stretched, leaving the sector vulnerable to any wobbles in sentiment. And wobble it did.
Shifting expectations for interest rate cuts, geopolitical flare-ups, and patchy earnings triggered sharp swings in tech indices. Market darlings tied to artificial intelligence (AI) were hit especially hard, as investors questioned whether growth projections could live up to the hype, and whether the Trump administration’s punishing tariff scheme would hit the tech giants heavily reliant on imports from Asia.
DeepSeek shook investor confidence
In particular, the emergence of controversial Chinese start-up DeepSeek spiked concerns that Silicon Valley’s stronghold on the ballooning AI market could be under threat.
Its latest model, DeepSeek R1, was released in January and claimed to rival the computing power of ChatGPT for a fraction of the cost. It reportedly cost just $6m to develop its AI-powered chatbot, compared to estimates of "over $100m" for OpenAI’s leading model GPT-4 (first released in 2023).1
Within days of release, DeepSeek rocketed to the top of the App Store2, and its immediate popularity sent shockwaves through equity markets on a global scale. Investors immediately questioned whether the sky-high valuations of established tech firms were sustainable if margins came under pressure. Leading chipmaker Nvidia saw $400bn wiped off its value in one fell swoop - the largest single-day loss for any S&P 500 company in history.3
Even the White House weighed in, with President Trump warning DeepSeek was a “wake-up call” for American companies, which he said needed to be “laser-focused on competing to win”.4
Doubts have since emerged around the validity of DeepSeek’s cost estimates5 and OpenAI has claimed there is evidence to suggest that DeepSeek “inappropriately” copied ChatGPT’s technology.6 This has somewhat tempered concerns, but the Nasdaq was nevertheless slow to regain ground and did not fully recover until as late as June.7
In spite of this turmoil, industry experts were quick to soothe investors’ anxiety and point out that the long-term potential for AI – and the tech firms responsible for its revolutionary rise – is no less compelling than before. The advent of DeepSeek undoubtedly shook expectations, but the sector’s foundations remain intact.
“It is important to remember that volatility is a normal feature of new technology cycles,” explained Ben Rogoff, Fund Manager at the Polar Capital Technology Trust.
“There were seven >15% corrections between 1995-98 (before the 1999 ‘melt-up’), where the NASDAQ returned +354%. At the moment, ‘typical’ technology-driven volatility around the emergence of a new general purpose technology is being compounded by exogenous macro and political volatility. More importantly, despite greater complexity post-DeepSeek, the fundamental AI story has shown rapid progress this year.”
Trump’s tariff chaos renewed worries
As the Polar Capital team pointed out, the political landscape added fresh turbulence – and new challenges – for the tech sector in H1 2025. Donald Trump’s return to the White House brought with it a new wave of tariffs on Chinese goods, with technology stocks right in the crosshairs.
The measures, announced in spring 2025, hit a broad basket of imports – from semiconductors and batteries to consumer electronics – sending ripples through supply chains that had only just begun to recover from pandemic-era shocks.8
For US-based manufacturers, there was a silver lining. Firms producing chips, servers, and other components domestically suddenly looked more competitive, buoyed further by the ongoing federal subsidies aimed at onshoring critical tech infrastructure.9
But for global technology giants – many of which still rely heavily on Chinese suppliers – Trump’s tariffs meant higher input costs and tighter margins, and continued uncertainty about how far the trade spat might escalate.
The impact wasn’t just confined to the US and China. European and Asian tech firms were caught in the middle too. Higher costs of hardware threatened to spill over into consumer pricing, while fears of retaliation from Beijing raised concerns over market access for Western firms.10
Analysts quickly warned that a prolonged tariff regime could slow innovation in capital-intensive sectors such as semiconductors and AI hardware. Others have pointed out that the volatility also represents an opportunity for the sector to evolve, and that the “winners” in tech will be the firms that are able to adjust and even leverage the changing geopolitical landscape to their advantage.
“While the Trump administration's tariff threats introduce volatility, they also accelerate structural shifts in the tech sector. Companies that adapt to these changes - by investing in automation, diversifying supply chains, and leveraging policy tailwinds - are likely to outperform in the long term.”11
The road ahead: Challenges and opportunities in H2
If H1 was marked by volatility, H2 2025 is shaping up to be about navigating challenges while keeping sight of the long-term growth story. Despite the short-term market shock from DeepSeek’s rise and Trump’s tariffs, the outlook for the sector remains positive, underpinned by secular trends that show no signs of slowing.
Familiar foes lead the pack
For the most part, the key challenges appear to be a continuation of familiar foes from earlier in the year. For instance, the AI price war sparked by DeepSeek is forcing incumbents to adapt faster than planned, with investors watching closely to see whether US and European leaders will be able to maintain premium positioning.
Supply chain demand is another potential pressure point. Tariffs on Chinese goods risk pushing up costs for semiconductors, servers, and batteries, just as demand from AI data centres is surging. This creates a difficult environment for firms reliant on global supply chains.
“A supply chain is a never-ending loop, right? That’s the purpose of the supply chain, and anybody who wants to improve their supply chain is really looking to better forecast the demand and then plan inventory to it,” explained Brian Wenck, CEO of global logistics firm, Flat World Global Solutions. “The tariff activity impacts forecast accuracy, leading companies to pause or cancel orders and beg or plead with vendors.”12
Geopolitical risk is also climbing. Beyond the US-China standoff, rising trade nationalism elsewhere could further reshape tech’s global landscape. For investors, this means volatility is probably here to stay, with company-level execution and resilience likely to matter more than broad sector exposure.
Shrewd stock-picking as a sensible strategy
Against this backdrop, the opportunity side of the ledger is still firmly compelling. AI adoption is moving beyond proof-of-concept into mainstream commercial use. From healthcare to financial services, AI applications are becoming embedded in daily operations, creating new revenue streams and cost savings that should support earnings growth for the sector at large.
For long-term investors, the message is clear: while the headlines may continue to swing between hype and fear, the growth case for technology is very much intact. The key will surely be in selective stock-picking – focusing on companies with durable business models, strong balance sheets, and the ability to adapt in a rapidly-evolving landscape.
In other words, volatility may dominate the near-term narrative, but for those willing to look beyond the noise, the rest of 2025 still offers fertile grounds for investment. The team at Polar Capital argue that, in the meantime, savvy investors may consider seeking the steer of active management to help navigate the uncertainty:
“We continue to strongly believe that AI represents the next general purpose technology and that the investment opportunity has not been fully reflected by markets,” Rogoff commented.
“We are hopeful this should support a rich environment for active managers (single stock dispersion is elevated) and a meaningful opportunity for our 11-strong experienced team of technology investment specialists to continue to deliver differentiated returns to the benchmark and the peer group.”
