Structural Tailwinds Shaping Today’s Technology and Defense Markets

Download PDF

A Positive Outlook on the Technology Sector

Despite recent narratives suggesting turbulence in the technology sector, our direct conversations with management teams tell a very different story. Across more than 30 company visits over the last several weeks, one message stands out: demand remains exceptionally strong. Many firms are operating at or near sold-out capacity and are actively looking to expand capacity.

This backdrop signals a healthy capital expenditure cycle. Companies continue to invest in growth, providing a solid foundation for sustained momentum. In short, what may look like “cooling” from a distance could be strength and disciplined expansion, when you speak directly to operators on the ground.

The Growing Necessity of Data Infrastructure Investment

The November 28 outage at the CME Group that disrupted global futures trading served as a timely reminder of the critical role that resilient data infrastructure plays in modern markets. Even brief disruptions highlight how dependent global commerce is on secure, redundant, and scalable data center architecture.

For investors, the lesson is clear: investment in data infrastructure is no longer optional, it is foundational. Companies across every sector are increasing spending to ensure uptime, cybersecurity, and the ability to support ever-rising computational workloads. This is a structural trend that we expect to continue for many years.

Hidden Monetary Policy Tailwinds

One underappreciated dynamic supporting risk assets is the end of Quantitative Tightening (QT) on December 1. This pivot opens the door for future Quantitative Easing (QE), should the Federal Reserve choose to add liquidity back into the system. Even without an official policy shift, the Fed’s recent actions, including November’s repurchase-agreement activity, suggest a willingness to stabilize funding markets when needed.

For investors, these steps matter. Accommodative monetary conditions can create tailwinds for equities, particularly for sectors such as technology that are sensitive to liquidity and credit availability.

Chiplet Technology: The Next Wave of Semiconductor Innovation

The semiconductor industry continues to evolve rapidly, and one of the most promising areas is chiplet architecture, a modular approach that enables faster performance improvements and better cost efficiency. During his December 1 remarks, Jensen Huang highlighted ongoing investment by NVIDIA in advanced design methodologies, including collaboration with partners such as Synopsys.

This validates that chiplets are not a theoretical future, they are already shaping product roadmaps. Component suppliers and specialty semiconductor are firms positioned to support this transition.

Evolving Dynamics in the Defense Sector

Defense spending is also undergoing meaningful change. With the new administration now in place, strategy and budget priorities have been realigned, an adjustment period that typically takes several quarters. Historically, the most significant flow-through of contract announcements and program starts tends to occur in years two through four of a new administration.

We have begun to see early indications of this cycle forming. As modernization efforts accelerate, particularly around aerospace, advanced electronics, surveillance, and missile-defense technologies, well-positioned defense suppliers may experience a more favorable demand environment.

Final Thoughts

Across technology, data infrastructure, semiconductors, and defense, we see more underlying strength than recent headlines suggest. Companies continue to invest, demand remains healthy, and several longer-term structural trends are creating fertile ground for future growth.

Earnings may accelerate as the benefits of deregulation, favorable corporate tax policy, potential targeted tariff relief, improved merger and acquisition activity, and AI productivity enhancements. Any and all of these tailwinds would be beneficial to companies, more specifically, for small-cap companies with substantial financial leverage.

We remain selective, focused on businesses with durable competitive advantages, strong balance sheets, and clear pathways to long-term value creation. The evidence we see today points toward continued opportunity rather than contraction, and we remain constructive heading into 2026.

Definitions and Disclosures

The information presented in this commentary is not intended as personalized investment advice and does not constitute a recommendation to buy or sell a particular security or other investments. This message is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund, or the Needham Small Cap Growth Fund (each a “Fund” and collectively, “the Funds”). Shares are sold only through the currently effective prospectus. Please read the prospectus carefully and consider the investment objectives, risks, and charges and expenses of the Fund carefully before you invest. The prospectus contains this and other information about the Fund.

Current month-end performance and a copy of the prospectus are available at www.needhamfunds.com or by contacting the Fund’s transfer agent, U.S. Bancorp Fund Services, LLC at 1-800-625-7071. Investment returns and principal value will fluctuate, and when redeemed, shares may be worth more or less than their original cost. Past performance does not guarantee future results and current performance may be higher or lower than these results.

Total return figures include reinvestment of all dividends and capital gains. Needham & Company, LLC, member FINRA/SIPC, is the distributor of The Needham Funds, Inc.

All three of the Needham Funds have substantial exposure to small and micro capitalized companies. Funds holding smaller capitalized companies are subject to greater price fluctuation than those of larger companies. Also, all the of the Needham Funds are permitted to engage in short sales, options, futures, and leveraged trading strategies. The Funds’ use of short sales, options, futures strategies, and leverage may result in significant capital loss.

The Russell 3000® Index measures the performance of the largest 3,000 US companies representing approximately 96% of the investable US equity market, as of the most recent reconstitution. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are included. The Russell 2000 Growth Index includes those Russell 2000 Index companies with higher price-to-value ratios and higher forecasted growth values. An investor cannot invest directly in an index. Needham & Company, LLC is a wholly owned subsidiary of The Needham Group, Inc. Needham & Company, LLC, member FINRA/SIPC, is the distributor of The Needham Funds, Inc.

The source of the data for each of the Russell 2000 Growth Index and the Russell 3000 Index (together, the “Indexes”) is the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. All rights in the Indexes vest in the relevant LSE Group company which owns the Index. The Indexes are calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. Neither the LSE Group nor its licensors accept any liability for any errors or omissions in the Indexes; no party may rely on the Index returns shown; and the LSE Group makes no claim, prediction, warranty or representation about the Fund or the suitability of the Indexes with respect to the Fund. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group is not connected to the Fund and does not promote, sponsor or endorse the Fund or the content of this prospectus.

Category