Retail investors who piled heavily into the semiconductor stocks at the heart of the artificial intelligence trade over the past week were badly bruised in Thursday's plunge.
JPMorgan strategist Arun Jain noted that over the past week, individual investors added to holdings in chipmakers, cloud service providers and storage device manufacturers, while buying in the so-called "Magnificent Seven" technology stocks weakened. He cited trading data from last Thursday through Wednesday. In a note to clients on Wednesday, he wrote that purchases of individual technology shares reached their highest level since the momentum trade faded in July.
On Thursday, as Middle East tensions escalated and concerns grew over the enormous spending on AI infrastructure, chipmakers led the S&P 500 lower, with the Philadelphia Semiconductor Index plunging 6.7% — its biggest single-day drop since June.
Among the stocks retail investors bought most were SanDisk (SNDK.US), Taiwan Semiconductor Manufacturing (TSM.US) and Nebius Group (NBIS.US). Nebius Group has recently gained popularity on retail investment forums. All of these companies fell at least 4% on Thursday. As of Tuesday, SpaceX (SPCX.US) ranked fourth on the retail buying list, but after the company released encouraging earnings and the stock rose 7.8% on Wednesday, investors chose to sell.
Retail investors haven't abandoned the AI trade — they've shifted to broader tech
Retail demand for technology exchange-traded funds was even stronger. Weekly inflows into tech ETFs reached their second-highest level on record, partly driven by dip-buying late last week. On Friday, single-day inflows into technology ETFs hit an all-time high, pushing weekly buying 2.1 standard deviations above the historical average. The VanEck Semiconductor ETF was among the funds drawing close attention.
Since megacap data center operators reported strong earnings in July, retail investors have favored the "Magnificent Seven" stocks. Their shift into other names shows that, as market volatility intensifies, they have not given up on AI-related investments but have instead moved into a broader range of technology shares.
"As the AI ecosystem generates earnings that prove more durable than initially expected, investors have rotated from the Magnificent Seven into the broader technology sector," said Joe Gilbert, portfolio manager at Integrity Asset Management.
The technology sector has been the main engine of corporate profit growth this year, helping sustain investor interest even as concerns about an AI bubble intensify. Data compiled by Bank of America shows that companies in the S&P 500 Information Technology Index are expected to post third-quarter earnings growth of 66%, second only to the energy and communication services sectors.
Gilbert added: "Outside the Magnificent Seven, particularly in a high interest rate environment, it is possible to achieve strong earnings growth at lower valuations."
The rotation comes as the technology selloff deepens. The Iran war has sent energy prices soaring, rekindling market worries about rising inflation. On Thursday, the Bloomberg Magnificent Seven Index fell as much as 3.8% after Meta Platforms (META.US) announced an increase to its annual capital expenditure plan; the tech-heavy Nasdaq 100 Index fell as much as 3.2%.
Still, JPMorgan data shows that enthusiasm for technology stocks has not translated into a broad buying spree, with overall retail fund flows remaining lackluster for the week.
Comments