Big tech equities saw a general decline this week, influenced by concerns over their valuations and wider economic apprehensions, which prompted a shift away from riskier assets. However, analysts suggest that underlying structural factors support a continued optimistic view of these tech behemoths. Despite the recent slump, major institutional money managers hold the lowest proportion of mega-cap tech stocks in 16 years, according to Morgan Stanley, indicating a potential for future growth as these assets are currently undervalued by large investors. Meanwhile, UBS analysts emphasize the robust earnings performance and the promising benefits from artificial intelligence integration as compelling reasons to remain confident in the sector's trajectory.
Institutional Underownership Signals Potential
Mega-cap technology stocks have been notably underrepresented in the portfolios of large institutional investors, reaching levels not seen in over a decade and a half, according to a recent analysis by Morgan Stanley. This significant underweight position suggests that these leading tech companies, including industry giants like Nvidia, Microsoft, Apple, and Amazon, may be poised for future appreciation as their market presence is currently undervalued by major investment firms. Such a disparity between institutional holdings and market weight often precedes periods of strong stock performance, indicating an attractive entry point for investors.
The latest Morgan Stanley report on 13-F filings highlights that active institutional money managers are holding less mega-cap tech stock than at any point in the past 16 years. Companies such as Nvidia, Microsoft, Apple, Amazon, Alphabet, and Meta Platforms are collectively under-owned by an average of 140 basis points relative to their S&P 500 weighting, marking an increase from the previous quarter. Nvidia, despite briefly becoming the first $4 trillion company, is the most significantly under-owned, with its institutional portfolio weight about 2.4 percentage points below its S&P 500 weight. Microsoft (2.39%), Apple (1.66%), and Amazon (1.4%) also exhibit considerable under-ownership. Morgan Stanley's research indicates a statistically significant correlation between low active ownership, when adjusted for market capitalization and earnings surprises, and subsequent stock performance. This suggests that stocks currently receiving less attention from institutional investors may experience a future uptick. Moreover, retail investor sentiment does not appear excessively optimistic; recent surveys from the American Association of Individual Investors show a notable decline in bullish sentiment and a rise in bearish sentiment, further supporting the idea that these stocks are not subject to widespread speculative enthusiasm.
Strong Fundamentals and AI Integration Drive Optimism
Despite recent market fluctuations and concerns over tech valuations, financial experts from UBS advise against overly cautious investment strategies in the technology sector. Their bullish stance is primarily driven by the robust financial performance of tech companies in the second quarter and the anticipated long-term benefits derived from advancements in artificial intelligence. This dual support from strong earnings and strategic AI integration underpins their confidence in the continued growth trajectory of the tech industry.
UBS analysts, in a recent note, underscored that while some short-term volatility in tech stocks is to be expected given their high valuations, investors should refrain from adopting an overly defensive posture. Their reasoning rests on several key factors. Firstly, the earnings reports from tech companies in the second quarter were exceptionally strong, with the majority surpassing both sales and earnings expectations. Furthermore, forward guidance, which typically softens throughout the reporting season, remained resilient, demonstrating underlying strength. For instance, cloud revenue at the three largest providers saw an average growth exceeding 25%. Secondly, internet and software companies are strategically incorporating artificial intelligence, and this integration is projected to continue yielding benefits. Although the revenue generated directly from AI has not yet fully aligned with the scale of investments, there are promising indications of progress as more companies embed AI capabilities into their core products and services. This strategic shift is expected to enhance efficiency and contribute positively to profit margins in the foreseeable future, making a compelling case for continued investment in the tech sector.