Dow Rises as Tech Rally Stalls: Insights from U.S. Fund Flows

Analysts Notebook joined discussion · Jun 24 04:55

Last week, the $Dow Jones Industrial Average (.DJI.US)$ rebounded from its June slump, while fluctuations in the stock price of AI leader $NVIDIA (NVDA.US)$, after reaching the top of the market cap rankings, not only weighed down the tech sector but also prompted reassessments of the industry's outlook and valuation. Additionally, some investors showed a willingness to take profits.

Looking ahead to this week, with $Micron Technology (MU.US)$'s earnings report and Personal Consumption Expenditures (PCE) data set to be released, market volatility risks remain significant.

Tech-Heavy Nasdaq Pulls Back, Dow Rebounds; Source: moomoo

Tech Rally Stalls: Shift in U.S. Market Trends?

U.S. big tech stocks may pause after a strong rally, offering hope for tepid market segments. While the $S&P 500 Index (.SPX.US)$ is up 14.6% this year, gains are concentrated in tech and communications sectors. Investors see long-term potential in tech, but worry about overheating. Meanwhile, lagging sectors like small caps and value stocks may present buying opportunities.

People want to be invested in this equity rally, and if they sell Nvidia the most likely places they are going to go is value and cyclical stocks," said Michael Purves, CEO of Tallbacken Capital Advisors.

A rotation out of big tech stocks could alleviate concerns over market concentration, as recent gains in the S&P 500 have been heavily driven by just five companies: Nvidia, $Microsoft (MSFT.US)$, $Meta Platforms (META.US)$, $Alphabet-A (GOOGL.US)$, and $Amazon (AMZN.US)$, which together account for about 60% of the index's 14%+ return this year. Indicators such as the Relative Strength Index of the Mag6 and the price ratio between the Nasdaq 100 and the S&P 500 Equal Weight Index suggest tech stocks are over-extended.

Dow Rises as Tech Rally Stalls: Insights from U.S. Fund Flows

Investor optimism is high, which some consider a contrarian indicator because it sets a high bar for positive surprises. Surveys show elevated sentiment among both retail and institutional investors, with fund managers increasing their equity allocations.

The recent gain in the $PHLX Semiconductor Index (.SOX.US)$ signals that AI enthusiasm might have gone too far. In the short term, a pullback in tech and semiconductor stocks could lead to a healthy rotation into other market sectors, sustaining the bull market. However, history shows that betting against tech has been a losing strategy over the past decade, with the $NASDAQ 100 Index (.NDX.US)$ significantly outperforming the $Russell 2000 Index (.RUT.US)$. Even if a pullback occurs, tech stocks are likely to rebound quickly as investors look to buy the dip.

Can Nvidia's Market Value Rise Even Higher?

Nvidia has been a rocket ship, and when things go up this quickly you don't want to be the last one through the exit door," said Michael Purves, CEO of Tallbacken Capital Advisors.

NVIDIA briefly became the largest U.S. company by market value last week and has seen its shares rise by 155% this year. Although Friday's 3% decline wasn't significant, it followed a 3.5% drop the previous day, raising questions about whether its rally is overextended and if the AI potential for this stock is nearing its limit.

An internal tension in the AI rally is that Nvidia's revenues come at the expense of major Big Tech companies like Microsoft, Meta, Amazon, and Google, which purchase most of Nvidia's chips. Charles Cara of Absolute Strategy Research points out that 40% of Nvidia’s revenues come from these companies, and their expected increase in capital expenditure is not substantial compared to Nvidia;s anticipated revenue growth.

The increase in capital spending by four major tech companies between the last fiscal year and 2025, estimated at $54 billion, represents more than 40% of the expected $100 billion revenue boost for Nvidia. However, only a fraction of Big Tech's spending likely goes to Nvidia's GPUs. This implies that either Big Tech will need to increase their spending or Nvidia's revenues will fall short.

We fear either tech sector cash flows or Nvidia sales are overestimated," writes Charles Cara of Absolute Strategy Research.

Next year, other tech companies might ramp up their spending with Nvidia, offsetting any shortfall from Big Tech. However, this would highlight the growing competitiveness of the AI market.

Source: REUTERS, FINANCIAL TIMES, Interactive Investor

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