The big story in July is the “market is broadening out.” As we approach the end of the month, everyone is talking about this. For once, this is not a bullish fantasy. The S & P 500 is up 2.3% this month, but the market really is broadening out , and former market leaders (tech and consumer discretionary) are lagging. Sectors this month Banks up 14.0% Energy up 5.2% Utilities up 4.2% Russell 2000 up 4.1% Dow transports up 4.3% REITs up 3.2% Metals/mining up 2.6% Technology up 1.3% Consumer discretionary up 1.1% ‘Ex-tech’ investing is having a moment Naturally, investors are starting to play this through ETFs, though the flows so far have been modest. There have been inflows into Financials ( XLF ), REITs ( XLRE ), Materials ( XLB ), and Industrials ( XLI ). Technology, on the other hand, has seen outflows most of this year. Think the Nasdaq 100 is just a tech index? It’s not. You might be surprised to discover that about 60 of the 100 companies in the Nasdaq 100 are not technology companies. The Nasdaq 100 includes Airbnb, Marriott, Costco, GE Healthcare, Ross Stores, and Honeywell. There’s an ETF for someone who just wants to buy the non-tech components. First Trust Nasdaq-100 Ex-Technology ( QQXT ) tracks an equal-weighted index of Nasdaq 100 stocks that excludes technology companies. It’s fairly small ($200 million in assets under management) but it has tripled its shares outstanding this year, a sign of strong investor interest. Similar story with the S & P 500. 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. This does include Meta (classified as communication services) and Amazon and Tesla (classified as consumer discretionary). Again, a small fund, but it has increased shares outstanding 50% this year, indicating strong inflows. Both are outperforming the S & P 500 this month, but only modestly. “If you see these funds are going up, that’s how bull markets are made here,” Todd Sohn, ETF and technical strategist at Strategas, said on ETF Edge yesterday. Tech bulls hope the AI revolution will ‘broaden out’ You can hear this “broadening out” story applied to technology stocks as well, though here the claims are based more on “hopium” than actual investor buying. We all know the tech bulls have got a problem: the huge rally in a small group of big-cap tech , mostly on AI hopes, is inflating values faster than earnings. The solution: bBulls say the tech rally is going to “broaden out” and will benefit far more companies than Microsoft, Alphabet, and Nvidia. “Many will benefit in this AI Game of Thrones Battle,” Dan Ives, senior equity research analyst at Wedbush, said in a recent note to clients. “The 2nd, 3rd, and 4th derivatives of this AI Gold Rush are just starting to evolve for the tech landscape” Ives wrote, specifically naming “Oracle, Amazon, Salesforce, Palantir, MongoDB, Apple, IBM, Meta, Adobe, Snowflake, C3.ai, and other tech stalwarts along with smaller players in the industry, to collectively spend tens of billions in this AI arms race in 2023/2024,” he wrote. Ives estimates AI in 2024 could comprise up to 8%-10% of overall IT budgets, vs. roughly 1% in 2023.
