Lessons from the Performance of US Big Tech

The recent performance of US big tech companies has raised questions about the narratives surrounding their market momentum. Earlier this year, any assumptions that the giants of the industry, commonly referred to as the ‘Magnificent Seven’, were on an unstoppable path faced a significant reality check.

Market Performance Overview

In the third quarter of this year, the S&P 500, alongside several of the major tech stocks, experienced a decline. This downturn followed a sell-off that initiated in late July. During the same period, however, markets in various other regions, notably Asia, showed signs of recovery.

Despite these setbacks in the United States, many leading stocks managed to stay positive for the year. This resilience influenced investor sentiment, especially among those engaged in passive investing, who continue to allocate funds towards well-known stocks and markets through conventional tracker funds.

Investment Trends in Europe

A look at the European exchange-traded fund (ETF) landscape for the third quarter reveals persistent interest in US equity markets. Morningstar, a research firm that analyzed these trends, found that European investors directed substantial flows into US large-cap stock funds. Specifically, the US large-cap blend equity category saw an influx of approximately €14 billion, with an additional €1.4 billion entering the large-cap growth equity segment.

Many investors also sought exposure to US stocks indirectly through global large-cap equity funds, indicating a broader belief in strengthening market fundamentals rather than purely seeking high returns from tech leaders like Nvidia. As noted by Morningstar’s Jose Garcia-Zarate, steady corporate earnings combined with anticipated interest rate cuts from the Federal Reserve played a crucial role in calming investor nerves about the US economy.

ETF Performance and Investor Sentiment

Interestingly, during the market fluctuations that negatively impacted major tech companies in August, there was an increase in investments towards equal-weighted S&P 500 ETFs. Three of the ten top-selling US large-cap blend ETFs adopted this strategy. Notably, the Xtrackers S&P 500 Equal Weight ETF and the iShares S&P 500 Equal Weight ETF performed admirably, achieving around a 9% total return in the third quarter, in stark contrast to the small losses incurred by the iShares Core S&P 500 ETF.

These equal-weighted funds not only excelled in the quarter but also outperformed the aforementioned S&P 500 ETF over the last twelve months. However, should the major tech stocks regain their strength, the balance could easily shift again.

Shifts in Investor Strategy

It's worth noting that different investment strategies have emerged in relation to US equities. For instance, US small-cap equity ETFs experienced inflows of €1.4 billion, marking the highest quarterly gain since the close of 2020. According to Garcia-Zarate, the anticipation of a rate-cutting cycle has sparked interest in smaller-cap stocks.

On the flip side, it was a challenging quarter for value ETFs, with the US large-cap value equity category seeing outflows of €0.1 billion. Generally, value-focused ETFs reported minimal net outflows during this period.

Conclusion

In conclusion, the recent market landscape highlights that the perception of US big tech's unstoppable progress may need adjustment. The performance in the third quarter reminds investors of the inherent volatility in markets and the importance of diversifying investment strategies.

performance, investing, tech