Lessons to Learn from the Performance of US Big Tech

The performance of US big tech stocks, often referred to as the Magnificent Seven, has faced scrutiny recently, challenging the belief in their unstoppable momentum. This reality check was particularly evident in the third quarter of this year, when the S&P 500, along with several of these leading tech stocks, experienced a decline following a sell-off that commenced in late July. In contrast, other major investment regions, especially in Asia, saw a revival.

Market Trends and Investor Sentiment

Despite the setbacks, US equities and the Magnificent Seven remain significantly favored by many investors, particularly within the context of passive investing. Investors can easily support leading markets and stocks through conventional tracker funds. Recent data from the European exchange-traded fund (ETF) market indicates a robust interest in US large-cap stocks during the third quarter of 2024. According to Morningstar, funds focused on US large-cap stocks attracted about €14 billion in net inflows during this period, with an additional €1.4 billion directed towards the large-cap growth equity sector.

Some analysts, such as Morningstar’s Jose Garcia-Zarate, suggest that the demand for these assets may stem from investors' confidence in improving economic fundamentals rather than just a quest for high returns from companies like Nvidia. He noted that strong corporate earnings combined with expectations of an impending Federal Reserve rate-cutting cycle have played a key role in easing concerns about the US economic outlook.

Shifts in Investment Approaches

The market volatility that impacted major tech stocks in August prompted a shift in investment strategies. There was a notable increase in the volume of funds going into equal-weighted S&P 500 ETFs, with the Xtrackers S&P 500 Equal Weight ETF and the iShares S&P 500 Equal Weight ETF emerging as the top performers during September. These funds delivered impressive returns, around 9 percent in Q3, outpacing declines in traditional market-cap-weighted options like the iShares Core S&P 500 ETF. This trend suggests that while mega-cap shares dominate, investors are beginning to diversify.

Furthermore, there was notable growth in US small-cap equity ETFs, which gained €1.4 billion—a significant increase and the highest quarterly inflow since late 2020. This trend indicates that investors are optimistic about opportunities within smaller-cap stocks as the rate-cutting cycle progresses.

Challenges for Value Investments

In contrast, the value side of the market struggled during this period. The Morningstar US large-cap value equity category experienced an outflow of €0.1 billion, illustrating a general weakness in value ETFs overall.

In conclusion, while the performance of US big tech stocks and the broader market showcases certain strengths, the recent fluctuations serve as a reminder of the volatility inherent in investing. Investors continue to seek out opportunities, often favoring diverse approaches in response to changing market conditions.

Investing, Technology, Market