Lessons to learn from US big tech performance

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Like any market narrative, the idea that US equities and big tech have unstoppable momentum does not always hold up to scrutiny.

That failure was evident in performance in the third quarter of this year, when the S&P 500 and several of the Magnificent Seven stocks slipped back thanks to a sell-off that began in late July. By contrast, we saw indices in most other major investment regions, including Asia, spring back to life.

The US and most of the market’s leading lights were still well up for 2024, and as a result they continued to dominate the thinking of many investors. That is especially the case when it comes to passive investing, where investors can bet on the leading markets and stocks fairly easily via conventional tracker funds.

A look at activity in the European exchange traded fund market for the third quarter of 2024 shows that those buying funds kept throwing their money behind the biggest names in the US equity market. Morningstar, which has totted up the figures, notes that funds with a focus on US large-cap stocks remained extremely popular in the period.

Funds in the research provider’s US large-cap blend equity category attracted some €14bn in net inflows for the quarter, with the US large-cap growth equity category taking €1.4bn on top of that. Investors also took on plenty of US exposure in a less direct manner by backing global large-cap equity funds.

As Morningstar’s Jose Garcia-Zarate noted, such demand could reflect investors’ belief in improving fundamentals rather than simply an eagerness to enjoy more blockbuster returns coming from names such as Nvidia. “The mix of solid corporate earnings and the eventual start of the Federal Reserve’s rate-cutting cycle were key to steadying nerves about the prospects for the US economy,” he said.

Garcia-Zarate added that, with market volatility knocking back the tech majors in August, the volume of money going into equal-weighted S&P 500 ETFs had risen, with three of the 10 best-selling US large-cap blend ETFs having such an approach. Two of these, the Xtrackers S&P 500 Equal Weight ETF and the iShares S&P 500 Equal Weight ETF, topped the table on this front in September.

These funds showed their worth. Both made a sterling total return of roughly 9 per cent in Q3, versus a small loss for the likes of the iShares Core S&P 500 ETF. They were also ahead of that fund for the 12 months to the end of the quarter, although a return to form for the megacap shares could quickly turn the tide here.

It is worth noting that investors were taking a different approach to the US in other ways. US small-cap equity ETFs took in €1.4bn, their biggest quarterly inflow since the end of 2020. As Garcia-Zarate put it: “Investors sense that the rate-cutting cycle opens opportunities in the smaller-cap spectrum of the market.”

Meanwhile, it was not a good quarter for value ETFs. Morningstar’s US large-cap value equity category suffered a €0.1bn outflow, with value ETFs more generally seeing a small outflow over the period.