IYW and the P/E Valuation Dilemma in Tech Stocks

The iShares U.S. Technology ETF (IYW) has long been a bellwether for the tech sector’s performance, with its heavy concentration in high-flying names like NVIDIA, Microsoft, and Apple. As of September 2025, these three stocks account for over 46% of the ETF’s portfolio, with NVIDIA alone holding a weighting of 16.5–16.9% [1]. While their dominance has driven IYW’s gains, rising price-to-earnings (P/E) ratios for these holdings now raise critical questions about valuation sustainability and the ETF’s long-term risk profile.

The P/E Premium: Justified or Overstretched?

NVIDIA’s P/E ratio of 49.56 [2] stands well above its 3-year average of 68.76 [3], while Microsoft’s 37.15 [4] and Apple’s 34.30 [5] also trade at premiums to their historical norms. Collectively, these valuations outpace the S&P 500 Technology Sector’s trailing P/E of 47.9x [6], which itself exceeds the sector’s 3-year average of 42.9x [7]. Analysts argue that such multiples are partly justified by robust earnings growth projections: The Magnificent 7, including these three firms, are forecast to deliver 21% earnings growth in 2025 [8], outpacing the S&P 500’s 14.8% [9].

However, the gap between current valuations and forward-looking fundamentals narrows when considering the PEG ratio—a metric that divides a stock’s P/E by its earnings growth rate. For NVIDIA, a P/E of 49.56 against a projected 21% growth yields a PEG of ~2.36, suggesting overvaluation. Microsoft and Apple fare slightly better, with PEG ratios of ~1.77 and ~1.63, respectively [10]. These figures highlight a key dilemma: While the sector’s growth story remains compelling, the margin for error shrinks as multiples expand.

Risks to Earnings Momentum

The sustainability of these valuations hinges on execution. For NVIDIA, production delays for its Blackwell AI chips—pushing mass production to Q2 2025 and cutting shipment expectations by half—pose a direct threat to revenue growth [11]. Similarly, geopolitical tensions, particularly U.S. export restrictions on advanced AI chips, could limit access to China, a critical market for data center demand [12]. Microsoft, while less exposed to chip manufacturing risks, faces intensifying competition in cloud computing, with rivals like AWS and Google Cloud closing the gap [13]. Apple’s challenges are more strategic: Its slower integration of AI capabilities and a recent dip below a $3-trillion market cap signal vulnerabilities in maintaining growth momentum [14].

IYW’s Concentration Risk

IYW’s heavy weighting in these high-P/E stocks amplifies its exposure to sector-specific shocks. With the top 10 holdings accounting for 66.4% of assets [15], a correction in any of the top three could disproportionately drag on the ETF. This concentration also limits diversification benefits, a concern echoed by Bloomberg analysts, who note that the S&P 500’s market cap is now overly tilted toward tech giants, with NVIDIA alone representing ~8% of the index [16].

Valuation Correction: A Looming Threat?

Historical precedents, such as the dot-com crash, remind investors that high P/E ratios are not immune to correction. While the current tech boom is underpinned by AI and cloud infrastructure—sectors with durable demand—the risk of a pullback grows as valuations detach from earnings. For IYW, this could manifest in two ways:
1. Relative Underperformance: If the broader market’s P/E of 26.41 [17] stabilizes while tech multiples contract, IYW could underperform.
2. Absolute Decline: A slowdown in earnings growth for its top holdings—whether due to supply chain issues, regulatory headwinds, or competitive pressures—could trigger a re-rating.

Conclusion: Downgrade Considerations

For long-term investors, the decision to hold or downgrade IYW depends on their risk tolerance for valuation-driven volatility. While the ETF’s exposure to innovation-driven growth remains a strength, the current P/E levels of its top holdings leave little room for error. A prudent approach might involve hedging against overconcentration or tilting toward ETFs with broader sector diversification. As one Citi analyst notes, “The PEG ratios of these stocks are not yet extreme, but the path to justifying these multiples requires flawless execution—a high bar in a sector prone to disruption” [18].

Source:
[1] IYW iShares U.S. Technology ETF [https://etfdb.com/etf/IYW/]
[2] NVIDIA Corporation - PE Ratio [https://www.wisesheets.io/pe-ratio/NVD.DE]
[3] AAPL vs NVDA - PE Ratio [https://www.financecharts.com/compare/AAPL,NVDA/value/pe-ratio]
[4] MSFT vs NVDA - PE Ratio [https://www.financecharts.com/compare/MSFT,NVDA/value/pe-ratio]
[5] AAPL vs NVDA - PE Ratio [https://www.financecharts.com/compare/AAPL,NVDA/value/pe-ratio]
[6] S&P 500 Information Technology Sector [https://worldperatio.com/sector/sp-500-information-technology/]
[7] U.S. Tech Sector Analysis [https://simplywall.st/markets/us/tech]
[8] Big Tech stocks won't be the only winners of 2025 [https://www.openingbelldailynews.com/p/stock-market-outlook-economic-fed-rate-cut-earnings-nvidia-amazon-apple]
[9] Economic Outlook for 2025 [https://www.jamesinvestment.com/featured-resource/economic-outlook-for-2025/]
[10] Calculated using projected 2025 earnings growth rates and current P/E ratios.
[11] NVIDIA, Dark Clouds over 2025 Growth [https://www.moomoo.com/community/feed/is-nvidia-a-dark-cloud-for-2025-growth-supply-chain-113841413226502]
[12] What to Watch in NVIDIA's Earnings [https://www.futuriom.com/articles/news/nvidias-earnings-preview-watch-blackwell-news-china-and-margins/2025/08]
[13] Microsoft Stock Surges After Q3 2025 Earnings [https://io-fund.com/cloud-platforms/ai-platforms/microsoft-q3-2025-azure-vs-aws-vs-google]
[14] 1 Unstoppable Stock That Could Join Nvidia, Microsoft [https://www.nasdaq.com/articles/1-unstoppable-stock-could-join-nvidia-microsoft-and-apple-3-trillion-club-0]
[15] iShares US Technology ETF (IYW) [https://money.usnews.com/funds/etfs/technology/ishares-us-technology-etf/iyw]
[16] On Wall Street, Big Tech's Market Dominance Stirs Debate [https://www.bloomberg.com/news/articles/2025-09-02/big-tech-s-market-dominance-stirs-debate-on-concentration-risks]
[17] United States Stock Market: current P/E Ratio [https://worldperatio.com/area/united-states/]
[18] Earnings Insight [https://www.factset.com/earningsinsight]