Lessons to Learn from US Big Tech Performance

In recent months, the narrative surrounding US equities and large tech companies like the so-called Magnificent Seven has faced a reality check. Despite earlier perceptions of unstoppable momentum, 2024 has revealed that market sentiments can change rapidly.

Market Overview

The third quarter of 2024 was particularly challenging for the S&P 500 and several key tech giants. A sell-off that started in late July caused these indices to decline, contrasting sharply with the resurgence of indices in other significant regions such as Asia.

Even though the US market faced difficulties, many of its leading stocks still showed gains for the year leading into 2024. This situation continued to shape the mindset of numerous investors, particularly within the realm of passive investing, where tracking leading markets and stocks has become quite simple through conventional funds.

Investors' Behavior

According to data from Morningstar, the European ETF market in the third quarter showed a clear trend: investors remained committed to US stocks. Funds focusing on US large-cap equities saw substantial net inflows—approximately €14 billion in net investments in the large-cap blend category and an additional €1.4 billion in growth equity funds.

This trend represents a mix of confidence in the underlying fundamentals of these companies, rather than simply seeking high returns from popular names like Nvidia. Morningstar's Jose Garcia-Zarate pointed out that solid corporate earnings combined with indications of an impending Federal Reserve rate-cutting cycle helped to stabilize investor sentiment regarding the US economy.

ETFs and Equal Weight Strategies

The market volatility experienced in August prompted a shift in investor strategy towards equal-weighted S&P 500 ETFs. This approach led to increased interest, with notable sales in top-performing ETFs such as the Xtrackers S&P 500 Equal Weight ETF and the iShares S&P 500 Equal Weight ETF, both of which reported impressive returns of about 9% in Q3.

Additionally, the success of these equal-weight funds highlighted the potential benefits of diversification. They outperformed traditional options like the iShares Core S&P 500 ETF, which recorded slight losses.

Small-Cap Investments

Interestingly, while large-cap stocks and ETFs gained substantial attention, US small-cap equity ETFs also came into focus, attracting €1.4 billion—marking their most considerable quarterly inflow since late 2020. Investors are beginning to sense that opportunities may arise in the smaller-cap sector, especially with the anticipated adjustments in interest rates.

Value ETFs Struggled

Conversely, value ETFs faced difficulties in the same period. The US large-cap value equity category witnessed a small outflow of €0.1 billion, indicating a lack of investor enthusiasm in this area during the quarter.

In conclusion, the lessons learned from recent performances highlight that the perception of invulnerability among US large-cap tech stocks can be misleading. Market dynamics can shift swiftly, making it essential for investors to remain adaptive in their strategies.

performance, investing, stocks