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The Market is Broadening Out: A Look at Non-Tech Investing
Market Leaders Shifting
In July, the big story is the market broadening out. As we approach the end of the month, there is a lot of talk about this phenomenon. Unlike other times when bullish fantasies dominate the conversation, this time it's a real change happening in the market. The S&P 500 is up by 2.3% this month, but what's interesting is that former market leaders in the technology and consumer discretionary sectors are lagging behind. Instead, we are seeing sectors like banks, energy, utilities, and others taking the lead.
Playing the Market Through ETFs
Investors are naturally attracted to this shift and are looking for ways to play it through ETFs. While the flows into these funds have been modest so far, there have been significant inflows into sectors such as financials, REITs, materials, and industrials. On the other hand, the technology sector has been experiencing outflows for most of this year. This shift in investor sentiment highlights the attractiveness of non-tech investments.
Non-Tech Components of Major Indices
Many investors may be surprised to learn that the Nasdaq 100, often associated with technology, actually includes a significant number of non-tech companies. Out of the 100 companies in the index, about 60 of them are not technology-related. Some well-known non-tech companies in the Nasdaq 100 include Airbnb, Marriott, Costco, GE Healthcare, Ross Stores, and Honeywell. For those who want to specifically invest in the non-tech components, there is an ETF available: First Trust Nasdaq-100 Ex-Technology (QQXT). This ETF tracks an equal-weighted index of Nasdaq 100 stocks that exclude technology companies.
The Appeal of Non-Tech ETFs
Similar to the Nasdaq 100, the S&P 500 also offers an ETF option for investors who want exposure to non-tech stocks. The ProShares S&P Ex-Technology ETF (SPXT) tracks a market-cap-weighted index of U.S. large-cap stocks, excluding firms in the technology sector. While these ETFs are relatively small in size, they have been gaining traction this year, indicating strong investor interest. Although they are only modestly outperforming the S&P 500 this month, they are still appealing options for investors.
AI Revolution and Tech Stocks
The idea of the market broadening out extends to technology stocks as well. However, in this case, the claims are more based on hope than actual investor buying. Tech bulls are facing the challenge of a rally in a small group of big-cap tech stocks, primarily driven by AI expectations. This rapid increase in values is outpacing earnings growth and causing concerns. To address this, bullish investors argue that the tech rally will eventually broaden out and benefit a wider range of companies beyond the usual suspects like Microsoft, Alphabet, and Nvidia.
The Potential Winners in the AI Battle
Analysts believe that many companies will benefit from the AI revolution in the tech industry. Dan Ives, a senior equity research analyst at Wedbush, predicts that companies like Oracle, Amazon, Salesforce, Palantir, IBM, and Adobe, along with smaller players, will collectively spend tens of billions in the AI arms race. He also estimates that AI could make up 8% to 10% of overall IT budgets by 2024, compared to around 1% in 2023. This forecast reflects the potential growth and opportunities in the AI landscape for tech companies beyond the current frontrunners.
Conclusion: Navigating the Changing Investment Landscape
The shifting market dynamics and the broadening out of sectors present both challenges and opportunities for new businesses looking to enter the investment arena. While traditional market leaders in the technology and consumer discretionary sectors may be lagging behind, sectors like banks, energy, and utilities are taking the lead. This shift in investor sentiment towards non-tech investments indicates the attractiveness of diversifying portfolios.
Investors are exploring opportunities through ETFs that focus on non-tech stocks. ETFs like QQXT, which tracks an equal-weighted index of non-tech companies in the Nasdaq 100, and SPXT, which excludes technology firms from the S&P 500, have gained traction due to strong investor interest. These ETFs provide exposure to a range of non-tech stocks, allowing investors to capitalize on the market's broadening out.
Additionally, the potential of the AI revolution in the tech industry presents a hot take for new businesses. While a small group of big-cap tech stocks is driving the current rally, AI is expected to benefit a wider range of companies beyond the current frontrunners. Analysts predict that companies like Oracle, Amazon, Salesforce, and IBM will invest significant amounts in the AI arms race, creating growth and opportunities in the AI landscape.
For new businesses, it is important to carefully evaluate market trends and identify areas of potential growth. Diversification and targeted investments, both within and outside the technology sector, may be essential strategies for navigating this changing investment landscape. The emergence of non-tech sectors and the potential of AI provide exciting avenues for new businesses to compete and thrive in the evolving market environment.
Article First Published at: https://www.cnbc.com/2023/07/25/the-broadening-out-rally-is-real-heres-how-to-play-it.html.svg)
