AI was all the rage in 2024.

Despite global macroeconomic and geopolitical uncertainties and cautious enterprise IT budgets, hyperscalers continued their relentless march toward building out their generative AI infrastructure. S&P Global Ratings estimates capital spending by large data center players (Microsoft, Alphabet, and Meta Platforms) increased nearly 50% in 2024 to about $160 billion. While these companies have yet to meaningfully monetize their AI investments, their cloud revenues still grew in excess of 20% as enterprise customers continued their migration to the public cloud, keeping overall IT services growth near 7% in 2024 (see table 1). Software spending, despite its perceived backseat to the AI buildout, remained resilient, growing near 9%, again reflecting the power of the recurring subscription model, although growth rates among smaller, sponsor-owned software providers were much lower.

The PC and smartphone industries finally turned the corner in 2024 after two years of a significant downturn. PC shipments grew just 1% but smartphone shipments rebounded nearly 6% due to pent-up demand after a two-year downturn. Global server shipments grew an estimated 7% in 2024, but industry revenues jumped more than 40% to nearly $200 billion, according to IDC, as the more expensive AI-enabled server shipments nearly doubled. We estimate hyperscalers now account for about 70% of total U.S. server spending.

The external storage market grew a modest 2% in 2024 while network equipment sales declined 11% after a strong 2023. The semiconductor industry was the biggest AI beneficiary, growing nearly 19% in 2024 due in part to massive spending on AI-related infrastructure including GPUs and high bandwidth memory (HBM). In all, we estimate global IT spending grew near 8.3% on a constant currency basis in 2024, higher than the estimated real GDP growth of 3.3% (nominal growth near 6%).

IT demand set to accelerate but is subject to U.S. trade policy implementation

Our 2025 global GDP forecast calls for a 3.0% growth (nominal growth near 5%). U.S. GDP growth will slow gradually to the 2% area in 2025, incorporating a partial implementation of proposed Trump administration policies and consistent with a soft landing, while the Eurozone will continue its gradual recovery, growing 1.2% versus 0.8% in 2024. China's growth will slow toward 4.1% as U.S. tariffs weaken exports and investment. That said, our global macroeconomic outlook is subject to the policy implementation of the new U.S. administration. Potential changes in fiscal, trade, and immigration policy from the U.S. are significant unknowns at this juncture. Specifically, it is unclear to what extent campaign promises will translate into policy, and when. Given the size of the U.S. economy, policy action on any of these fronts can affect our outlook for global IT spending.

Despite the uncertainty that lies ahead for global trade, we forecast global IT spending will grow a robust 9% in 2025, higher than in 2024 and much greater than our expectations for global GDP growth. We note our forecast has a high degree of variability. In our economic forecasts, we assume President-elect Trump will use his executive powers to impose targeted tariffs on China by raising the bilateral (weighted average) effective tariff rate on Chinese imports to 25%, from an estimated 14% currently, and that Beijing would likely reciprocate with equivalent barriers on U.S. exports to the country. We further assume that such tariffs could be managed over time by most hardware providers by passing on much of the incremental costs to end users and through supply chain reallocation, albeit gradually. Conversely, we do not assume any potential upside in U.S. enterprise IT spending should corporate tax cuts be implemented in 2025.

Hyperscalers will continue to generate revenue growth well above 20% in 2025, partly supported by gradual monetization of AI investments, and contribute to an overall strong IT services growth near 8%. The software segment will continue to outpace the overall IT industry, with a modest acceleration to around 10%, although some investment-grade companies may exceed that level. While AI-related gains are nascent overall, we believe the continued strong growth among software vendors validates their strategy of providing productivity gains and lowering customers' operational costs.

Enterprises are entering 2025 with an improving IT spending view as they continue their transition to the cloud and slowly ramp up their investments in generative AI projects. We believe hardware spending will improve materially in 2025. Server shipments should grow near 4% but revenue growth will be much higher given high AI server ASPs. We expect network equipment and mobile telecom equipment makers to return to growth while storage sales should grow around 4%. PC and smartphone shipments should grow in the 2%-3% range but industry revenues should be higher given a gradual infusion of AI-enabled devices.

We forecast the semiconductor industry, already the biggest beneficiary of the AI arms race, will outgrow the overall IT industry again, at near 12% growth, largely from a continued adoption of AI compute (GPU, HBM, among others) as well as a rebound in non-AI-related demand. We estimate that industry revenues, excluding memory and NVIDIA Corp., will grow in the mid-single-digit percentage area after experiencing a similar decline in 2024.

China remains the wild card; it accounts for about 10% of the worldwide IT spending but plays an outsized role in the credit-sensitive hardware and semiconductor space, accounting for more than 20% of global consumption. Domestic Chinese IT demand remains tepid aside from ongoing semiconductor investments. Further deterioration in its relationship with U.S. or Taiwan, or interruption to the global supply chain, will have a disproportionate impact on overall global IT consumption.

We maintain a positive long-term view of the technology industry. Industries from health care to energy will increase their investments in IT, and AI in particular, to increase sales, hasten R&D, and achieve operational efficiency. We believe the technology sector will become less cyclical as it matures. IDC Corp. estimates that as-a-service will increase to over 50% of enterprise technology spending by 2025. This spending is sticky, recurring, and less prone to shutting down even during economic downturns because both customers and providers have entered into long-term commitments. At the same time, pockets of volatility within hardware and semiconductor segments are here to stay, especially as it relates to the current pace of AI investments which we believe is unlikely to be sustained beyond 2025.

Below we discuss the outlooks for key technology products.

IT Services

We expect the IT services industry to grow at a rate well above global GDP, at around 8% in 2025. Hyperscale cloud providers will sustain robust revenue growth in excess of 20%, whereas the rest of IT services should recover with growth of around 5% after lackluster performance in the past two years.

We anticipate this recovery given early signs of demand stabilization during the second and third quarters of 2024, as many IT service providers reported growth in bookings for large transformation projects and improving annual contract values in key verticals like financial services. This view assumes investments in cloud-native technologies that enable the scalability of IT infrastructure, data cleansing, and real-time analytics necessary to support digital transformation. In addition, hiring trends--which are a leading indicator of higher backlogs and expectations of higher demand--are also beginning to step up after six consecutive quarters of decline.

Despite potential macro-related demand headwinds, AI aspirations will be increasingly critical to achieving business objectives in 2025 and will serve as a key driver of growth. This is because stricter cybersecurity regulations, such as the EU Cyber Resilience Act and Digital Operational Resilience Act (DORA), along with global regulatory requirements, will require businesses to prioritize compliance and security projects. This environment will make it harder for companies to delay investments in cloud adoption, AI, and compliance solutions, which should help unlock pent-up demand. Interest rate cuts from the Federal Reserve and the European Central Bank should reduce cash outlays on interest payments, and these savings could alleviate budgetary pressure and be redirected toward technology investment.

The growing adoption of generative AI also presents some risks to the industry, as increased automation may potentially exert deflationary pressures on revenues, elevate competitive intensity in the broader IT services industry, and bring about structural shifts, most notably for traditional customer experience (CX) solution providers. It could also result in potential disintermediation and secular declines in the business process outsourcing (BPO) and legacy infrastructure technology outsourcing (ITO) subsectors of industry.

Software

Uneven global macroeconomic conditions could affect IT spending in 2025; however, we expect another year of robust software growth of about 10% in 2025, compared to about 9% in 2024. This slight acceleration from 2024 maintains the growth trend of the past two to three years, with some uplift attributed to AI-associated spending. We expect that AI-related spending growth will significantly outpace that of overall software growth, although it will represent a smaller share—less than 10%—of total spending, which is projected to be between $1 trillion and $1.2 trillion. We expect key industry drivers will include enterprise digital transformation initiatives that accelerated post-COVID-19, the integration of AI in software and business automation workflows to enhance efficiencies, and an increased focus on cloud and network security, among others.

While the current AI hype has yet to translate to significant software revenues for large software as a service (SaaS) companies, client interest remains strong. Companies expect ongoing technological development and investment to promote deal activity. As such, we expect enterprise AI experimentation and interest to remain high, with new product introductions in this area generating incremental growth and potential value-based average selling price increases for software vendors over time. For instance, Salesforce.com Inc. has experienced strong momentum since launching AgentForce, reporting that deals exceeding $1 million with AI have tripled year-over-year, along with a robust deal pipeline. Microsoft has achieved a run rate of over $10 billion in revenues including Azure AI services. Similarly, ServiceNow Inc.'s Now Assist AI platform has seen strong deal signings, contributing to an increase in client spend of $90 million to $100 million in annual contract value over the past few quarters.

SaaS will benefit from digital transformation initiatives and should continue to grow at a rate exceeding that of total software growth. We expect that the secular trends supporting the industry, such as demand for lower ownership cost, scalability, and ease of implementation, will remain intact. As enterprises continue to migrate their workloads to the cloud, software providers are facilitating the transition for on-premises customers to adopt the SaaS delivery model for their applications.

Semiconductors

We expect global semiconductor industry revenue growth will decelerate to 12% in 2025 following a breakneck pace of 19% in 2024. However, we think this growth will be more broad based across all segments. We project that all segments will grow by at least mid-single-digit percentages in 2025 after memory and NVIDIA Corp. drove the industry growth in 2024, which offset inventory corrections, particularly in the industrial and automotive end markets. Excluding memory, we expect industry revenue growth to accelerate to 11% in 2025, up from 6% in 2024. Additionally, we estimate that industry revenue, excluding memory and NVIDIA, will grow in the mid-single-digit percentages after experiencing a similar sized decline in 2024.

Continued investments in AI and cloud infrastructure are fueling robust demand for data center chips. Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) expects its AI-related revenue to more than triple in 2024 and represent a midteens percentage of overall revenue, which serves as a reliable indicator of industry dynamics. General purpose server CPU demand is showing signs of improvement, with both Intel Corp. and Advanced Micro Devices Inc. noting recovery in their respective server businesses, while TSMC expects growth in non-AI applications to improve. The PC and smartphone markets are progressing through inventory corrections, with manufacturers reporting gradual improvements in channel inventory. We expect end demand to be supportive, with end units for both markets growing in 2025. As a result of these factors, we expect the industry's logic segment to grow 17% in 2025 following 20% growth in 2024. We also expect microcontroller segment growth to accelerate to 6% in 2025 rebounding from flat growth in 2024, as microcontroller revenue stabilizes after a severe downturn due to inventory corrections in the industrial and automotive end markets.

The industrial segment continues to face headwinds, with most manufacturers reporting persistent weakness. Texas Instruments Inc. noted that while industrial markets have stabilized, they remain near cyclical lows. Despite a notable slowdown in the automotive market, the expected peak-to-trough decline should be less severe than that of the industrial sector. Secular growth drivers, such as increasing electronic content per vehicle—resulting from electric vehicle adoption and advanced driver assistance systems--support this relative resilience. We expect conditions in both end markets to improve in 2025 following the conclusion of inventory adjustments, resulting in industry-wide analog revenue growth of 8% in 2025 after a 3% decline in 2024.

Memory revenue growth will slow to 17% from around 80% in 2024, which included a significant price rebound after the industry restored a favorable demand and supply balance by cutting capex and idling some capacity, following two years of significant oversupply. For 2024, we expect segment revenue to marginally exceed the previous peaks from 2018 and 2021. Industry leaders are benefitting from demand for high-bandwidth DRAM and enterprise NAND solid-state drives for AI applications, which are significantly more profitable than trailing-edge products that are facing increasing competition from Chinese manufacturers.

We expect pricing pressure to intensify for mature semiconductor nodes due to heightened competition from Chinese manufacturers. This growing supply will increasingly satisfy Chinese domestic demand, displacing foreign providers and leaving them with excess capacity that must be redirected outside of China. For now, we see Chinese companies competing more in mature nodes; however, given the country's ambition to rapidly advance its domestic semiconductor industry, we will closely monitor for signs that these participants are competing for more advanced nodes over the next few years.

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Network Equipment

The networking industry is poised for a rebound in 2025. We project that industry revenue will grow by 7% after a challenging downturn in 2024, which saw an 11% revenue drop. This decline followed three years of robust growth, averaging 10%, well above what we consider to be the long-term growth trend in the 2%-4% range. This growth resulted from high demand to support the networking requirements of remote work during the pandemic, coupled with supply shortages that gave the industry pricing power. Networking was one of the last technology markets to resolve its supply constraints, which is why stabilization has taken longer than in PCs or smartphones.

Over the next few years, ongoing digital transformation initiatives, cloud migration, and the continued refinement of hybrid work models will propel the industry. The integration of AI and machine learning into network management will be pivotal, enabling automation and operational efficiency. These technologies will facilitate predictive maintenance, real-time anomaly detection, and intelligent resource allocation, helping organizations respond more quickly to security threats and performance challenges. Moreover, the convergence of networking and cybersecurity will become increasingly critical as the threat environment grows more complex, with AI potentially accelerating both defensive and offensive technological capabilities. While enterprises are rapidly expanding their presence in the public cloud, they are also recognizing the need to modernize on-premise network infrastructure to support increasingly sophisticated AI projects. Notably, data privacy concerns are compelling many organizations to retain certain AI inferencing (the process by which a trained machine learning model uses new data to draw conclusions) capabilities within their own data centers. This further emphasizes the strategic importance of robust, flexible networking technologies in the evolving digital ecosystem.

Mobile Telecom Equipment

The global mobile telecom equipment market has experienced significant volatility in recent years, but we forecast a turnaround to modest growth in 2025, following a revenue decline of 11% in 2023 and an estimated 10% in 2024.

The decline in 2023 was primarily due to a slowdown in 5G investments in North America, while the decline in 2024 largely reflected reduced activity in Europe and Asia, along with a stagnant demand environment in North American. 5G investments were front-loaded relative to previous technology cycles, resulting in substantial growth from 2020 to 2022, particularly in North America, where 5G subscriptions accounted for approximately 70% of mobile subscriptions in 2024. In addition to coverage investments in this new technology, supply chain issues prompted customers to build up inventory, which further boosted growth through 2022. However, as the supply chain began to normalize in 2023, customers reduced their investments in new equipment in both 2023 and 2024. Furthermore, macroeconomic headwinds with high inflation and elevated interest rates over the past two years have postponed additional mobile investment, contributing to a slow and delayed recovery that we now anticipate in 2025.

Our expectation for modest growth in 2025 is supported by normalizing customer inventory levels and an uptick in investments. We anticipate that 5G coverage reached approximately 55% of the global population in 2024, with mid-band coverage—capable of handling more data and offering higher speeds than low-band 5G—projected to cover only 50%. This indicates that significant 5G rollouts remain, particularly in emerging markets, where the availability of 5G-compatible handsets is reaching a critical mass, making investments increasingly attractive. In more developed markets, we expect investments to focus on densification and capacity expansion of existing networks to accommodate mobile traffic growth, which is currently increasing at about 20% annually. However, we believe these investments will be demand-driven, and therefore gradual, unless and until new cases are widely adopted, leading to a spike in demand. To some extent, we also expect growing demand from enterprises for advanced use cases requiring higher speed and lower latency, which could further support investments in 5G.

Storage

We expect the external storage systems (ESS) market to continue its gradual recovery throughout 2025, with industry revenues projected to grow by 4% for the year, versus roughly 2% expected for 2024. Growth in the storage market remained relatively tepid throughout 2024, as enterprises prioritized AI-related spending over storage, and regions outside the U.S. faced macroeconomic headwinds. However, strong demand for all-flash array (AFA) solutions will continue to push the market higher in 2025. AFA makes up around half of the external storage systems (ESS) market, up from 40% in 2020 and 20% in 2016. Over the longer term, we expect AFA will continue taking share from hard disk drive (HDD) and hybrid systems as the price difference narrows.

We believe that long-term midcycle growth for the segment will be in the 2%-3% range, which is below that of overall IT spending growth. This is primarily because enterprises are increasingly meeting their storage needs through cloud services rather than on-premises hardware. In 2025, improving IT budgets and the need to support growing data volumes, along with enhanced data protection, should support a solid improvement in storage spending. Storage providers should benefit gradually from the rising AI workload as spending gradually shifts from cloud providers to enterprises.

We continue to see large cloud providers leverage their scale to custom-build storage infrastructure instead of purchasing it from major branded OEMs such as Dell Inc., HP, and NetApp Inc. Therefore, the adoption of the hybrid cloud approach--where some workloads remain on premises while others shift to the cloud--is critical for the viability of the ESS market. We expect that enterprise customers, who have traditionally been major purchasers of ESS and have growing storage needs, will continue to utilize software to optimize their storage capacity, putting pressure on ESS' growth rate.

PCs

Global PC unit shipments are projected to grow by 3% in 2025, up from approximately 1% growth in 2024. We expect this acceleration in PC shipments to be driven by replacement demand following the Windows 10 end-of-life support. However, increasing downside risks for PC demand exist, including sluggish economic conditions in China, the growing likelihood of tariffs on Chinese PC imports into the U.S., and geopolitical instability in certain regions.

Enterprise demand is a key driver for PC shipment growth in 2024 and 2025, fueled by Windows 10 end-of-life support. Additionally, AI PC penetration is anticipated to rise in 2025 and 2026; however, the limited use cases observed thus far may result in a more gradual increase in AI PC shipments through 2025. We forecast that AI PCs will account for approximately 20%-30% of total PC shipments in 2025, with that figure rising to 50% or more in 2026.

The growth of AI PC penetration and enterprise demand is expected to contribute to an increase in the average selling price (ASP) for PCs over the next two years. This trend should lead to PC revenue growth in the high-single-digit area in 2025. Conversely, the optimism among PC OEM's regarding AI PC demand in 2025 and 2026 could pose a risk if actual demand falls short of expectations, potentially resulting in an inventory correction and discounts on AI PC products.

Operating margins for PCs are likely to remain stable in 2025, despite rising prices. These higher prices reflect increased component costs associated with the additional neural processor unit (NPU) chip in AI PCs.

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Smartphones

We anticipate that the growth of smartphone unit shipments will slow to 2.4% year-over-year in 2025, following an estimated rebound of 5.7% in 2024 fueled by pent-up replacement demand. The strong influx of lower-end smartphones in emerging markets may lead to increased overstocking risks in 2025, particularly as rising economic uncertainties affect consumer sentiment. Conversely, we expect a modest improvement in the more developed markets of the U.S. and Europe after a year of subdued growth. Overall, smartphone replacement rates should remain relatively stable, although advancements in generative AI (Gen AI) and geopolitical risks present additional challenges for smartphone manufacturers in forecasting demand and managing inventory.

As we move into 2025, smartphone original equipment manufacturers (OEMs) will experience diverging trends. Apple Inc. is likely to see incremental benefits from stabilizing U.S. market demand and the gradual introduction of its proprietary AI software features in various international markets, which will support replacement sales. However, iPhone sales in China may continue to face challenges due to regulatory barriers that limit software differentiation, compounded by local vendors offering competitive alternatives.

Android smartphone OEMs may lag iOS in 2025, with Samsung experiencing limited growth. The South Korean manufacturer is facing competition in the entry-level market segment from Xiaomi Corp., Transsion, and Honor, as these Chinese players continue to promote their low-end models for shipment growth, particularly in Africa and Southeast Asia. Xiaomi is solidifying its position as the third-largest global participant by shipment volume, widening the gap with Vivo. The company is likely to increase the penetration of its affordable smartphones in overseas markets such as Africa and Latin America while maintaining its share in the mid-to-high price range domestically.

We expect the ASP of smartphones to grow at a low- to mid-single-digit percentage rate in 2025, with minimal benefit for hardware margins. In mature markets, consumers may lean toward higher-specification and more durable phones, resulting in a shift in shipment mix toward the premium segment. Additionally, intense price competition in some emerging markets during 2024 has squeezed the profitability of budget phone manufacturers, leaving them with less flexibility to lower prices further. A more balanced growth between mature and emerging markets will also support overall global ASP. On the supply side, rising costs for memory and other components, along with Gen AI-driven upgrades to System-on-a-Chip (SoC) capabilities, will put pressure on OEMs' already thin margins. Notably, Chinese smartphone vendors Xiaomi and Vivo have increased the prices of their new flagship models powered by the Snapdragon 8 Elite SoC in late 2024.

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Servers

We estimate that server shipments increased a robust 7% in 2024, led by strong AI-optimized server demand from hyperscalers and a recovery in traditional server sales during the second half of the year. We believe that AI server shipments doubled to approximately 1.3 million units during the year, although they still only accounted for around 10% of total server shipments. In contrast, total industry revenues reached around $197 billion in 2024, according to IDC, an increase of 42% year-over-year from $137 billion reached in 2023, largely due to significantly higher ASP of AI servers.

Our view for 2025 is somewhat mixed. Given the continued strong capex guidance provided by leading hyperscalers, along with comments from NVIDIA, we expect AI server shipment growth to persist throughout 2025, albeit at a decelerating pace. At the same time, we believe traditional server shipments are likely to remain flat year-over-year, as solid hyperscaler demand is offset by relatively weak enterprise demand, with companies continuing to migrate to public cloud solutions. Potential upside to our forecast includes timing of tariff implementation, which could pull forward 2026 orders into 2025, as well as potential corporate tax cuts that could spur overall enterprise demand. In all, we expect server shipments to grow a solid 4% in 2025 with industry revenues rising in the range of 10%-20%.

IDC forecasts that worldwide server spending will grow at a robust 16% CAGR through 2028. However, we note that legacy hardware providers such as Dell Technologies Inc. and Hewlett Packard Enterprise Co. are likely to underperform the market growth rate over the long term as the industry continues to shift from on-premise solutions to the cloud-based services. In fact, cloud providers, who mostly bypass OEMs and order through ODMs, account for more than half of all server purchases and this number continues to rise.

Printer

We continue to maintain a conservative outlook on printer unit growth, as digital substitution leads to declining paper usage, consistent with the structural decline in the paper industry. We expect printer unit sales to decrease by approximately 5% in 2024 due to the economic downturn in Europe and China, followed by a return to a 2%-3% decline trend after 2025. In the meantime, we believe Xerox will lose market shares amid severe competition, while other companies will scramble to secure sales units. Regionally, growth in low-internet-penetrated countries within the Asia-Pacific region and South America--particularly China, India, and Brazil--will help keep the overall industry relatively stable.

The industry is no longer hampered by supply chain issues but we expect revenues to remain challenged. As interest rates remain high, weak macroeconomic conditions will continue to deter advertising expenditure and capex, leading to reduced printing. The industry will also suffer from a competitive pricing environment, as some manufactures are engaging in aggressive price co

petition. This situation will hinder the normalization of inventories and backorders, while some leading companies are prioritizing profitability over unit sales by controlling their shipments.

We believe that industry reorganization will persist as the market matures and downward pressures on profitability increases. In an industry crowded by Japanese manufacturers, some companies, such as Ricoh Co. Ltd. and Toshiba TEC Corp., have announced plans to integrate their production through business alliances. We expect these integrations to improve operating efficiency in the long term, but it may take time to enhance profitability due to the complexities of the integration process and the initiation costs associated with it.

We see industrial and commercial printers as the few growing segments within the mature printer industry. Unit growth in these areas is likely to remain modestly positive, driven by the demand for digital printing. Units sold will also benefit from organizations seeking to modernize their IT infrastructure by enhancing traditional printers with more advanced features, including cloud connectivity, security, and AI capabilities.