Why technology retains its dominance in investments
In the past few years, investors have focused their attention on the Magnificent 7: Apple, Microsoft, Amazon, Alphabet (Google's parent company), Meta, Nvidia, and Tesla.
However, in the face of changing circumstances, we believe investors should broaden their horizons. The technology sector, broadly defined, includes stocks categorised according to the Global Industry Classification Standard (GICS) as broadline retail, movies and entertainment, and interactive media and services. They can be collectively referred to as 'Broad Tech', which aligns with the stocks making up the Nasdaq 100 index.
Broad Tech includes the so-called Magnificent 7, except Tesla. The industries represented by Broad Tech have dominated the US stock market since the late 1990s. Their outperformance has accelerated with the advent of the artificial intelligence (AI) revolution. Moreover, the US trade war has less impact on them, because their export revenues are mainly driven by services, which are largely insulated from tariffs on goods.
This may explain why since 'Liberation Day' on Apr 2, there has been comparatively less impact on earnings expectations for these stocks, whether in the US or emerging markets.
Overall, the US index that best represents Broad Tech industries is the Nasdaq 100; for the remaining sectors in the market, a good proxy is the Russell 1000 Value index. It should be noted that although Broad Tech largely consists of growth stocks, not all growth stocks belong to Broad Tech industries.
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If you are looking for Broad Tech investment opportunities, the US market is of course the first choice. In the MSCI USA Index, Broad Tech industries make up about 46 per cent of the market capitalisation. Asia is not bad either: in the MSCI Emerging Asia Index, the weight is 33 per cent. In contrast, Japan and Europe's Broad Tech stocks account for only 14 per cent and 9 per cent of their respective MSCI indices.
US equity: AI still the growth engine
After the US election, many investors had expected the US economy and stocks to benefit from Trump's victory, but the result was initially not as expected. In local currency terms, the S&P 500 Index fell by 3 per cent between election day and the end of the first quarter, compared to a 1 per cent rise in the MSCI All Country World Index ex-USA (ACWI, local currency terms).
The US performance was disappointing partly due to the larger-than-expected US tariffs. In addition, the US consumer market showed signs of slowing down. In the first quarter of this year, US personal consumption expenditures (PCE) increased by only 0.1 per cent, compared to the prior quarter (seasonally adjusted annual rate), well below the 0.8 per cent average rate of 2024. Retail sales were also lower.
Meanwhile, Europe and China brought a lot of good news. Europe promised to increase its defence budget and Germany has big infrastructure plans, while China was boosted by AI breakthroughs.
For all the weakness of US consumer demand, the economy has had a surge in business investment. This has been concentrated in information processing equipment and software, reflecting the key role AI is playing in US economic growth and corporate profits.
The economic data released by the US after Liberation Day has been mixed, but generally positive. Second-quarter GDP showed a strong rebound; retail sales have slowed; the labour market is softer but resilient; Purchasing Managers' Indices have mostly improved.
We have yet to see a significant inflationary effect from tariffs. Predictions remain fraught, however, as the current economic environment is unique and traditional forecasting models may be less effective.
If positive factors such as US deregulation and fiscal stimulus policies bear fruit, and if the US can negotiate to lower the tariffs its exporters face, the US stock market may continue its positive trend in the coming months. However, if trade negotiations with China break down, or US consumer demand weakens more than expected, the stock market will face risks.
Emerging markets: China's tech breakthrough
In emerging markets, there are also many Broad Tech options. The launch of DeepSeek highlighted that even if the US imposes restrictions on the export of advanced technologies to China, China still has significant domestic capabilities to spur innovation.
Led by Broad Tech companies, the MSCI China index outperformed developed market equities by a wide margin in the first half of this year. China saw a phenomenon similar to the US, where a few technology stocks dominated.
The CSI Global China Internet index has dominated the performance of the broader market index. One could say that if investors can accurately judge the direction of China's technology stocks, they will grasp the pulse of the broader market.
Compared with the strong performance of the CSI index, the MSCI China A Onshore index has lagged, indicating that factors such as the real estate bubble and Sino-US trade tensions are still plaguing the domestic market.
Some analysts believe that China can offset the impact of US tariffs by stimulating domestic demand, but it is still too early to say whether it will be effective over the medium term. Chinese investor sentiment has not yet recovered from the Covid pandemic, and if the real estate market continues to be sluggish, households may remain cautious about consumption.
European equities: Focused gains
Although European stock markets have a lower Broad Tech share, they delivered a good performance in local currency terms, rising by 6 per cent in the first quarter of this year – far better than the S&P 500.
Monetary policy is a key driver of the market rise. As the European Central Bank has cut interest rates, bank shares have outperformed. In addition, Europe's sharp increase in defence spending and Germany's fiscal stimulus policy have improved investor sentiment towards European stock markets.
In conclusion, the current market environment has parallels with early 2024, when many investors expected the economy to enter a recession and consequently underweighted equities. Today, many are worried about the impact of tariffs. Of course, investors must always be conscious of risks, but the global economy seems resilient and may yet bring more positive surprises this year.
One should also not lose sight of the benefits of easier monetary policy from central banks, including the US (eventually). Although the US may no longer be as exceptional as it was, there are many other attractive growth themes in global markets.
The writer is chief market strategist, BNP Paribas Asset Management
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