US stocks fell across the board last week, with the Nasdaq... The composite index fell more than 3%, marking its biggest drop in nearly seven months. (According to Bank of America) The latest data shows that, facing the recent index correction in tech stocks due to valuation concerns, institutional investors are adopting strategies similar to those used by retail investors, opting to buy on dips, while individual investors remain hesitant. Amidst market sector rotation, discussions about valuation risks remain heated.
Institutional investors enter the market to buy at the bottom.
Data from Bank of America's equity trading division shows that net purchases of exchange-traded funds (ETFs) reached $4.3 billion last week, the highest weekly record since December 2022.
In its weekly report, Bank of America's global research team noted that the scale of these purchases was sufficient to offset outflows from individual stocks. However, unlike recent trends, the main buyers this time were Bank of America's institutional clients—who had been selling the previous week; while individual investors, who had been steadily buying during the market correction this year, did not enter the market this time. In fact, this is the first time since the end of September that Bank of America's retail clients have chosen to remain on the sidelines during a market correction.
Since the 2008 financial crisis, the "buy low" strategy has brought investors stable short-term returns, and this year the strategy has performed particularly well.
A team of Bank of America global analysts, led by Jill Carey Hall, said: "Historically, our retail clients have been the most steadfast buyers on dips (especially since 2020), but this year institutional clients have also begun to adopt a buy-on-dips strategy."
CBN reporters noted that institutional investors' enthusiasm for technology stocks has remained consistently high this year. A Bank of America fund manager survey released last month showed that 39% were long on the Big Seven tech giants, making it the second most crowded trade after gold.
Valuation risks remain to be released
This week, Japanese technology investment giant SoftBank Group reduced its stake in Nvidia. News about shares, and artificial intelligence CoreWeave's downward revision of its earnings forecast has once again raised concerns in the market about the rapid rise in valuations of technology companies.
S&P Global A research report released on Tuesday pointed out that the most significant indicator of a shift in market sentiment is the short position data of major technology sub-sectors. Currently, the North American semiconductor sector... The short interest rate for companies in the semiconductor equipment category has reached 0.285%, the highest level this year.
Recently, investors seem to be caught in a dilemma: on the one hand, they worry about missing out on AI-related investment opportunities, and on the other hand, they are concerned about the risk of a market resembling that of the dot-com bubble. With the federal government's reopening imminent, the market has begun to exhibit sector rotation characteristics, with the Dow Jones Industrial Average, representing the traditional economy, rising strongly and recording its 17th closing record high of the year on Wednesday.
Wells Fargo The investment research institute stated that current market expectations for artificial intelligence (AI) technology stocks are too high, making the sector susceptible to underperformance. They recommend reducing holdings of AI-themed technology stocks and selecting other "more advantageous" investment targets. The institute has already included AI-related stocks in its S&P 500 Information Technology sector portfolio ( Nvidia , Microsoft, etc.) . Broadcom The rating for companies closely related to AI transactions (including well-known companies in this sector) has been downgraded from "positive" to "neutral".
Douglas Beath, global investment strategist at Wells Fargo, acknowledged that the benefits of AI will drive revenue and profit growth for related companies, and that the information technology sector as a whole has relatively low debt levels and strong free cash flow generation capabilities. Capital expenditures related to AI are continuing to grow rapidly, and the third-quarter earnings reports released by major technology companies have exceeded previously high market expectations. "However," he said, "the sector's valuation has already risen significantly. We are wary that the market's overly optimistic sentiment and excessively high expectations for this sector may lead to a risk of underperformance in the short term."
On the other hand, despite significant increases in AI-related capital expenditures announced by some leading companies, investor concerns about return on investment and debt financing can still trigger market volatility at times. "This round of correction may ultimately prove to be temporary, but we believe the sector still faces the risk of negative surprises; even a slight underperformance in corporate earnings could have an impact. We recommend reducing holdings in the information technology sector and lowering its allocation to market benchmark levels to lock in existing gains," he added.
While reducing its holdings in technology stocks, Beas revealed that Wells Fargo Investment Institute recommended investing in three "promising" sectors: "industrials and utilities." The sector allows investors to access rapidly growing auxiliary data centers. Trend is driving investment in the AI sector, and valuations are lower than the information technology sector. We believe the financial sector is poised to benefit from a steeper yield curve and a more favorable regulatory environment. Furthermore, the sector can support AI development through M&A activity and debt financing, and its current valuation is significantly discounted compared to the S&P 500,” he explained.
As one of the first investment banks on Wall Street to release its outlook for next year, Goldman Sachs The team of strategists expects the S&P 500 to reach 7,600 by the end of 2026, an 11% increase from current levels, but investors should lower their expectations accordingly.
A major uncertainty in the forecast lies in the "extremely high" concentration of stocks in the US market—in recent years, the exceptionally strong earnings and valuations of tech giants, driven by artificial intelligence , have inflated the overall stock market's price-to-earnings ratio and returns. Goldman Sachs wrote in its report: "If these companies can maintain their dominance, then stock market returns over the next 10 years could exceed most forecasts, just as they have over the past decade. Conversely, if the profitability and/or valuations of these leading companies decline, and no new batch of 'superstar stocks' emerges, then as the valuations of these large-cap stocks currently fall, overall market returns could be dragged down."
(Article source: CBN)
