Investors have sought shelter from the turmoil of the war in Iran in US tech stocks, in a flight away from sectors seen as vulnerable to an energy shock.
Technology has been the best-performing S&P 500 sector since the conflict began, rising 1.5 per cent from the market close on February 27 — the eve of the US-Israeli bombardment — despite every other sector in the index dropping, as global investors put aside fears of the disruption caused by AI and seek refuge in the stellar profits of Silicon Valley’s Magnificent Seven tech giants.
“I often hear from clients that the Magnificent Seven are like a safety asset,” said Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, adding that the big tech companies were “like countries in terms of the size of their balance sheets and their [competitive] moats”.
The relatively strong performance of US tech stocks marks a sharp turnaround in market sentiment.
Before the conflict, the megacap tech companies fell out of favour as their massive spending alarmed investors, causing an index of the Magnificent Seven stocks to fall more than 6 per cent in the first two months of the year. Meanwhile, fears that AI tools would disrupt entire industries were front of investors’ minds, prompting dramatic sell-offs in sectors including software, asset management and insurance.
But surging global energy prices since the start of the conflict have changed investors’ calculations. The same Magnificent Seven index has risen more than 1 per cent since the conflict started, while the rest of the US stock market, along with other global indices, has dropped.
“In a more uncertain environment where the outlook for inflation and growth is less clear . . . at least we know [the big tech companies] are growing, they’re generating profits, they’re throwing out cash,” said Michael Walsh, multi-asset portfolio manager at T Rowe Price.
“That seems like a good place to park and move away from some of the banks or materials that might be more exposed if the economy sees a very negative outcome.”
The S&P 500 banks sub-index is down 3.4 per cent since the start of the conflict, while the materials sub-index is down almost 7 per cent.
Tech will “keep behaving like a defensive asset in this backdrop because it does not have the first order impact . . . of maximum energy intensity”, said Manish Kabra, head of US equity strategy at Société Générale.
Last month, as investors grappled with the possibility of AI decimating asset-light business models, a new so-called “Halo” trade gained popularity: a preference for “heavy asset, low obsolescence” stocks that were seen as immune to AI disruption.
But the energy price shock revealed some weaknesses of those sectors. “Heavy assets need energy, and they’re potentially more exposed to energy shocks in some cases,” Mueller-Glissmann said.
The surge in volatility following the US-Israeli strikes also forced many investors to de-risk their portfolios and unwind some bets, including concentrated short positions in sectors such as software that are considered vulnerable to the threat from AI.
“Hedge fund shorts on software were very large, and there’s a chance some of that got washed out,” Mueller-Glissmann said, adding that this repositioning probably explained a large part of the positive move in tech stocks.
A Goldman Sachs prime services report showed that between February 27 and March 5, technology was “by far the most net bought global sector”, led by US tech, a move that was “almost entirely driven by risk unwinds/short covering”. During that time, software stocks, which were hit hardest in the sell-off before the conflict, were among those most bought within the information technology sector.
As well as hedge funds unwinding short bets, some investors are taking another look at some of the heavily sold software names. Analysts at Deutsche Bank on Tuesday upgraded the technology sector as a whole from underweight to neutral, and upgraded software specifically to overweight, saying that “AI disruption worries have peaked”.
Software is “seen to be less impacted by the war in Iran” because “lower energy usage compared with many other sectors leaves it relatively insulated against higher oil prices”, said Mike Fox, head of equities at Royal London Asset Management.
However, with signs emerging that the US administration is keen to bring the conflict to an end, investors said the market could quickly swing back to a focus on the “AI disruption” trade.
“That’s what the market was obsessing about barely a week ago, and I don’t think that’s fundamentally changed,” Fox said.
Additional reporting by Ian Smith in London
