AI spending is taking no prisoners and is crushing the cash flows of the biggest names in the Technology sector.
If you’ve read our latest research, you know that we think at least two tech giants are likely to drop out of the AI race and give up their leadership status.
In our latest Danger Zone report, we’ll show just five companies are the last tech giants standing and carrying the overall tech sector’s fundamentals on their broad shoulders. So, the Mag 7 is now the Mag 5. Given our findings in our recent AI Winners and Losers reports, the Mag 5 might be the Mag 3 in the not-too-distant future.
Below is a free excerpt from our latest Danger Zone report, published to Pro and Institutional members. You can buy the full report a la carte here.
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Historically, Tech Is in a Class of Its Own
It’s no secret that over the last several years, the Technology sector has been, by far, the most profitable sector. Over the trailing-twelve-months (TTM), the overall Technology sector generates a return on invested capital (ROIC) that is nearly double the ROIC of the S&P 500. The gap between the two is rising over the past few years as well. See Figure 1 from the full report.
Figure 1: Aggregate ROIC: Tech Vs. S&P 500: 2021-2025/TTM
Sources: New Constructs, LLC and company filings
Calculated by summing the individual S&P 500 and Technology sector company values for NOPAT and average invested capital to calculate ROIC. We call this approach the “Aggregate” methodology. The Aggregate methodology provides a straightforward look at the entire sector, regardless of market cap or index weighting.
In addition to the highest ROIC, the Technology sector also boasts, relative to the other ten sectors:
- the most free cash flow,
- the most net operating profit after-tax (NOPAT), and
- the highest NOPAT margin.
The takeaway was clear: if you want highly efficient, highly profitable business, buy tech.
But, a look beneath the surface reveals this strength is built on the backs of just five companies.
Remove 1% of Tech Companies and The Strength Collapses
Five companies continue to generate billions in profits and operate with some of the highest NOPAT margins in the market.
To illustrate this point, if you remove these five, or 1% of the companies from the sector calculations, top and bottom-line metrics fall precipitously:
- Revenue: -33%
- NOPAT: -55%
- Core Earnings: -56%
- Economic Earnings: -77%
- FCF: -127%
See Figure 2 from the full report.
Figure 2: Technology Sector Metrics: With and Without Tech Giants: 2025/TTM
Sources: New Constructs, LLC and company filings
Tech Is Not a Safe Sector: Avoid the Landmines
As shown in the full report, the Technology sector’s superior profitability is far less diversified than investors likely realize. The Mag 5 contribute a highly disproportionate share of revenue, profits, and free cash flow.
In the current market, passive exposure to the Technology sector is not diversified exposure to elite profitability, as many believe. Despite the flashy narratives across the sector, if you’re not buying the cream of the crop, your portfolio could be in big trouble. There are plenty of good stocks elsewhere.
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