Evaluating the Performance of U.S. Big Tech: Lessons for Investors

The idea that the major U.S. tech companies, often referred to as the "Magnificent Seven," have a continuous and unstoppable momentum has been put to the test this year. Markets can be unpredictable, and even the strongest sectors can experience downturns.

In the third quarter of this year, the S&P 500 index and several of the Magnificent Seven stocks faced declines after a sell-off started at the end of July. This sharp reversal stood in contrast to a rebound seen in indices across various other global markets, including Asia.

While the U.S. markets had been performing well and remained up heading into 2024, this decline prompted investors to reconsider their assumptions about the tech giants' invincibility, especially in the realm of passive investing. This approach allows investors to easily invest in market-leading stocks through traditional index funds.

Interest in U.S. Large-Cap Funds

Despite the dips, following trends in the European exchange-traded fund (ETF) market during the third quarter revealed that many investors continued to be drawn to the biggest names in U.S. equities. Morningstar's research indicated a strong demand for U.S. large-cap stocks, with these funds attracting around €14 billion in net inflows during the quarter. Additionally, the U.S. large-cap growth equity category added another €1.4 billion.

Moreover, many investors indirectly sought U.S. exposure by investing in global large-cap equity funds. Morningstar analyst Jose Garcia-Zarate commented that this inflow might stem from investor confidence in improving economic fundamentals rather than just a desire for high returns from popular stocks like Nvidia. Garcia-Zarate highlighted that solid corporate earnings and the anticipated beginning of the Federal Reserve's rate-cutting cycle has helped ease concerns about the U.S. economy's outlook.

Shifts in Investment Strategy

The volatility experienced in August prompted a shift in investment behavior. There was a marked increase in investments in equal-weighted S&P 500 ETFs, with notable purchases in funds like the Xtrackers S&P 500 Equal Weight ETF and the iShares S&P 500 Equal Weight ETF, which were among the top-performing funds in September.

Those funds exhibited a total return of approximately 9 percent in the third quarter, outperforming other large-cap funds like the iShares Core S&P 500 ETF, which saw slight losses during the same period. Furthermore, although the megacap stocks may regain strength, these equal-weight funds provided a more stable return over the past year.

It is also essential to note a growing trend among investors favoring U.S. small-cap equity ETFs, which recorded net inflows of €1.4 billion—the most significant quarterly inflow since late 2020. Garcia-Zarate suggested that a potential rate-cutting cycle might lead investors to identify more opportunities in smaller-cap companies.

The Changing Landscape for Value ETFs

On the other hand, it was not a favorable quarter for value ETFs. The U.S. large-cap value equity category experienced outflows of €0.1 billion, indicating a cooling interest in value strategies overall during this period.

In conclusion, the recent performance of U.S. tech stocks serves as a valuable lesson for investors. The idea of unstoppable momentum can falter in the face of market realities, and diversifying within U.S. equities, including exploring small-cap and equal-weight strategies, may yield better outcomes in the long term. It remains crucial to remain vigilant and adaptable in the ever-changing landscape of the stock market.

tech, investment, performance