Could 2025 Be a Repeat of 2022 for Big Tech?

Investors often love investing in tech stocks because of how much upside there can be in both the short term and long term. Companies involved in next-gen technologies can become incredibly popular, but they can also rise to unsustainable valuations.

Back in 2022, tech stocks crashed, and inflated valuations had a lot to do with that decline. While the S&P 500 (SNPINDEX: ^GSPC) didn't have a good year, falling more than 19%, the Technology Select Sector SPDR Fund (NYSEMKT: XLK) was down 28%. Nvidia crashed more than 50% that year, while Meta Platforms tanked a whopping 64%.

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Valuations in tech look exceedingly concerning again, and it begs the question: Could the sector be headed for another crash in 2025?

XLK data by YCharts

What went wrong for tech in 2022?

In the early stages of the pandemic, consumers received stimulus payments, and economic conditions were strong. And a lot of spending was done online, prompting companies involved in e-commerce and other online businesses to feverishly add staff.

Companies went on hiring sprees and invested heavily in their operations to meet this strong demand. In 2021, Microsoft CEO Satya Nadella referred to the growth in online services as "the dawn of a second wave of digital transformation sweeping every company and every industry." For some big tech companies, their head count rose by more than 50% from 2019 to 2022, with Meta and Amazon more than doubling in size.

But ultimately, big tech misjudged the situation and interpreted a short-term trend during the pandemic as a new normal that would last for the long term. As a result, layoffs would follow. According to data from Crunchbase, 93,000 jobs were lost in tech in 2022. The following year, another 191,000 were lost.

While tech stocks would end up recovering in 2023, a big reason for that was the new hype in artificial intelligence (AI), with the emergence of ChatGPT in late 2022. Otherwise, the sell-off could have very well continued.

Are tech companies overspending again?

Today, tech companies are spending heavily on AI, which many are convinced will again, as Nadella said four years ago about online services, result in a significant transformation that can potentially affect every business and industry. That original quote was from 2021, but I'm sure readers wouldn't be surprised to hear similar words again today. Unfortunately, when it comes to tech, the hype can be significant, and later on prove to be too bullish.

Meta Platforms plans to spend at least $60 billion on capital spending this year as it invests heavily in AI. Microsoft has even more ambitious plans, which call for $80 billion in expenditures into AI data centers in its current fiscal year.

It sounds convincing that chatbots and automation will drastically improve people's day-to-day lives. But the cost is proving to be significant. Sam Altman, CEO of OpenAI, which owns ChatGPT, says that even at $200 per month for the pro subscriptions to its popular chatbot, the company is still losing money on those subscriptions.

The recent news that Chinese AI company DeepSeek had developed an AI model similar to ChatGPT for less than $6 million sent the markets into a panic in late January, as investors likely feared that once again, tech has perhaps spent too aggressively. But when a company is spending as quickly and as much as Meta and Microsoft are, odds are high that there will be a lot of unnecessary costs along the way -- the big question is how much.

Should investors get out of tech before it's too late?

When hype is high, and spending in tech is soaring, the result can be catastrophic like it was in 2022. And my concern is when I see a stock like Palantir Technologies soar after a strong earnings report and trading at well over a couple of hundred times its trailing earnings, that investors don't appear to even care about valuations anymore in the tech sector. This attitude can increase the risk of a crash.

At some point, the bubble is bound to pop. Today, the average stock in the Technology Select Sector SPDR Fund trades at 39 times earnings, and many tech stocks are well above that.

I don't believe that all tech stocks are overvalued, but many of them are. You don't necessarily have to get out of tech today, but it's important to consider the valuations of the stocks that you're holding. If a stock trades at over 100 times its trailing earnings, you should have a lot of confidence that the premium is justifiable -- and in many cases, it probably isn't.

The danger of ignoring valuations is that high-priced stocks can be among the most vulnerable during a correction. While it's nice to expect that stocks will only continue going up, investors should brace for the reality that a significant correction and even an all-out crash could be around the corner.

The Technology Select Sector Fund is down 2% this year. It isn't in the midst of a huge crash, but it's not off to a great start, either. A full-blown crash might not happen in 2025, but investors should always be prepared for the possibility, especially given how expensive the sector has become.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.