Lessons Learned from the Performance of US Big Tech

The recent performance of big tech companies in the United States has provided valuable insights for investors. Earlier this year, the long-held belief that the so-called "Magnificent Seven" stocks had unstoppable momentum faced a harsh reality check. The idea of limitless growth and continuous upward trends has not been as reliable as some might think.

Market Dynamics in Q3

During the third quarter of 2023, the S&P 500 index, along with several prominent stocks in the Magnificent Seven group, experienced a downturn. This decline was initiated by a sell-off that began in late July. In contrast, stock indices in other major global markets, particularly in Asia, showed signs of recovery.

Despite the downturn, many investors maintained a positive outlook on the US market, especially looking ahead to 2024. This confidence was largely reflected in the popularity of passive investing strategies. Many investors continued to favor traditional tracker funds that bet on leading US markets and prominent stocks.

Investment Trends in Europe

In analyzing the European ETF market for the third quarter, it was evident that investors remained focused on US equities. According to Morningstar's analysis, there were significant net inflows into funds targeting US large-cap stocks, totaling approximately €14 billion in the quarter. Additionally, the US large-cap growth equity category attracted €1.4 billion.

Investors were not only boosting their direct investment in these stocks but were also gaining US exposure through global large-cap equity funds. As Morningstar's Jose Garcia-Zarate pointed out, the demand for these funds likely indicates investor confidence in improving company earnings and the anticipated onset of a Federal Reserve rate-cutting cycle, both of which have helped to alleviate concerns about the US economy's trajectory.

Shifts in Investment Approaches

The shift in investor strategies was noteworthy, especially following the August sell-off that impacted major tech stocks. There was a notable increase in the investment volume directed towards equal-weighted S&P 500 ETFs. Specifically, funds like the Xtrackers S&P 500 Equal Weight ETF and the iShares S&P 500 Equal Weight ETF emerged as top performers in September, achieving total returns of around 9% in Q3, contrasting with slight losses seen by traditional index funds.

This performance underscores how different fund structures can yield varying results, especially during unstable market conditions. However, it's essential to remember that if large-cap shares regain their strength, these trends may swiftly change.

Interest in Small-Cap Stocks

Interestingly, there was a significant uptick in investor interest toward US small-cap equity ETFs, which garnered €1.4 billion in inflows—marking their largest quarterly inflow since late 2020. This trend suggests that investors are beginning to recognize opportunities within smaller-cap companies, especially as the rate-cutting cycle appears to open new avenues for growth.

The Value ETF Struggles

On the other hand, value-oriented ETFs did not fare as well during this period. Morningstar's data indicated a slight outflow of €0.1 billion from the US large-cap value equity category, signaling a retreat from value strategies in favor of other investment approaches.

Investment, Market, Trends