2024. UK tech sector conditions broadly worsened in 2024, with software showing signs of stabilisation at end-of-year but services still in digging-in mode, albeit with pockets of strength (e.g. SME spend for VARs). Despite this, the sector performed ahead of the UK market, aided by M&A but with little positive impact from the “AI platform shift” to date. In contrast to the pandemic, stock selection became more pronounced, which we see as ongoing. Outlook. The aggregate tech spend forecast outlook has marginally improved for 2025 versus 2024. The general macro outlook and forecasts we see suggest only minor changes year-on-year, albeit there is a wide margin for error given the US outlook. Still, Tech’s position as an above-GDP sector better insulated than others from factors such as tariffs seems embedded, even allowing for tougher conditions and without any AI tailwind. Valuation. At c23x PE, the sector is trading at a c4% premium to its two-year average, slightly off its early 2024 highs, and a c2x premium to the general market. Looking at just FTSE 250 Tech, it is trading at a 1.6x market premium, slightly below its average, partly due to the weaker performance of larger IT Services names (Kainos, CCC). This report contrasts a range of valuation metrics with financial KPIs, exposing areas of upside opportunity where valuations lag growth, margin and cash, as well as highlighting where delivery seems priced in. This analysis supports our stock call framework below. Our core growth picks. Tech always has a sprinkling of core growth picks underpinned by secular drivers uncorrelated to wider general conditions, along with strong company execution potential and an associated valuation upside. These include Boku, Bytes, Craneware and Eagle Eye. Hidden growth. There is a healthy “hidden growth” segment in UK tech, where stocks have exceptional growth and financial performance capability, not reflected in market sentiment, leading to valuation anomalies. Stocks such as ActiveOps, GBG, and Idox fit this category, while Alfa Financial Software is entering a golden era with potential earnings & valuation upside. Hold tight. Quality IT services names where macro is tough, but the end-market competitive strength is distinct, with through-the-cycle business model strength demonstrated, include Kainos, NCC, FDM, and Focusrite. Timing the exact inflection point is difficult, but these recovery stocks offer a potential combination of trough earnings and trough valuation. Iomart is similar, albeit with a shift in the business model and commercial offering being executed. Cautious. We remain cautious on Computacenter, Softcat and Sage; the first has ongoing risk to forecasts, while valuation is an issue for the latter two. Meanwhile, Cerillion has more short-term trading risk than before, but we retain our longer-term Buy in this case as we see a very significant opportunity.