Chart of the Week: Nobody Gets in Trouble for Buying Too Many Tech Stocks

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Technology Fear is Genuine, and Investors Are Responding Properly

Thanks to developments in artificial intelligence and other fields, technology companies have led the market’s recent advances. The most recent statistics and market movements support the idea that this trend is not slowing down. The seven megacap firms that have been dominating the markets for the past two years have witnessed “Magnificent” returns, persuading investors that tech is the industry to be in lest they fall behind.

Technology’s Domination in Long-Only Active Mutual Funds

Savita Subramanian, chief US equities strategist at Bank of America, pointed out in a note to clients on Friday that during the last year, the majority of the companies that had the biggest growth in ownership from long-only active mutual funds were heavily concentrated on technology. According to our Chart of the Week, tech stocks held nine of the top ten positions. Eli Lilly (LLY), a significant participant in the GLP-1 weight-loss medication family that includes well-known medications including Ozempic, Wegovy, Mounjaro, and Zepbound, was the lone exception. However, considering the biotech advancements that support these medications, even Eli Lilly’s inclusion can be connected to tech-centric innovation.

Broadcom and Nvidia at the Front of the Pack

NVDA, the stock that most people are buying, is currently held by almost 68% of funds. The largest rise in fund ownership was observed in Broadcom (AVGO), which went from 26% in April 2023 to 45% a year later. Within the IT industry, Subramanian observed a favorable correlation between the rise in fund ownership for each stock and the quantity of “AI” comments during earnings calls. This pattern demonstrates how AI has a big influence on investing choices.

Investor Confidence and Tech’s Resilience

The research indicates that despite the fact that tech stocks garner a large amount of market attention and investment, investors think they won’t face any consequences for owning these stocks. The industry’s steady innovation and productivity increases, which raise profits and, in turn, stock market value, are the main sources of this confidence. The market, according to Subramanian, seems “narrow” since Big Tech is getting favorable adjustments to its profit estimates while the other 493 non-megacap companies take cutbacks.

The Effect of AI on Old Economy Stocks

It’s interesting to note that the Bank of America team believes AI developments would also help “old economy” equities. Both demand-side businesses and those engaged in the production of AI supply, such as those in copper and electricity, are benefiting. This shows that AI is becoming more prevalent outside of the computer industry and increasing productivity in a variety of businesses.

The Wider Consequences of Technology and AI Investments

Artificial Intelligence (AI) is driving innovation ahead and revolutionizing productivity, which boosts stock market valuations and profitability. Due to this dynamic, investors are feeling pressured to get involved in the tech sector’s expansion out of concern that they may lose out on the next big innovation wave. Over the past ten years, technology has experienced a number of these moments in history, from the emergence of PCs and the internet to the widespread use of smartphones and social networking sites like Facebook.

An Investment Plan Focused on Technology

Because of the indisputable momentum of artificial intelligence, the present financial landscape is significantly weighted towards technology equities. The notable rise in tech stock holdings by long-only active mutual funds is indicative of this trend. Leading the way with significant growth in fund ownership are Nvidia and Broadcom, indicating the attractiveness of the industry.