Hedge Funds' Tech Stock Buying Spree Hits 5-Month High

Key Takeaway

• Hedge funds accelerated tech stock purchases last week, marking the largest net buying since December 2022, driven by optimism in sector fundamentals.
• Semiconductors led the buying spree with hedge fund allocations at a five-year high; overall, hedge funds net bought US stocks at the fastest rate in five months.
• Despite a broader S&P 500 tech index slump earlier in April, upbeat earnings from Alphabet and Microsoft spurred a 5.1% rally in the sector.

Hedge Funds Rally Behind Tech Stocks

In a notable shift, hedge funds have aggressively increased their stakes in technology stocks, marking the largest net buying activity since December 2022. This surge was propelled by a combination of new long positions and short-covering, as reported by Goldman Sachs Group Inc.’s prime brokerage. Despite the S&P 500 Information Technology Index experiencing a downtrend for most of April, hedge funds continued their buying spree for the fourth consecutive week. This move was seemingly vindicated by strong earnings reports from tech giants Alphabet Inc. and Microsoft Corp., which reignited investor confidence in the sector's fundamentals.

Seema Shah, Chief Global Strategist at Principal Asset Management, highlighted the undeniable long-term potential of the technology sector. She noted that the recent market pullback offered a more attractive valuation point for investors to increase their exposure to this enduring and secular theme. The S&P 500 Information Technology Index responded positively, rallying 5.1% last week and breaking a four-week losing streak, its longest since September. Alphabet's market value surged past $2 trillion, buoyed by investor optimism around its AI prospects, while Microsoft's stock benefited from its AI advancements in the latest quarterly results.

Semiconductors Lead the Charge

The buying frenzy wasn’t uniform across all technology sub-sectors but was particularly pronounced in semiconductors and semiconductor equipment companies. Hedge funds’ allocation in this sub-sector soared to 4.4% of their overall US single-stock allocation, reaching a peak not seen in over five years, up from just 1.1% at the beginning of the year. This significant increase underscores the strategic importance placed on semiconductors, a critical component of the broader technology industry's infrastructure.

Mixed Sentiment Across Sectors

While technology stocks enjoyed robust buying, the sentiment was not universally bullish across all sectors. Consumer discretionary stocks faced net selling, with hedge funds employing a strategy of offsetting new long positions with more aggressive short sales. Similarly, the staples sector saw a predominance of short sales, indicating a cautious or bearish outlook from hedge funds on these segments of the market. Despite these disparities, the overall US stock market, as represented by the S&P 500, posted its best week of 2024, nearly reaching the 5,100 mark, driven in part by the tech sector's resurgence.

Street Views

• Seema Shah, Principal Asset Management (Bullish on the technology sector):

  "The long-term potential for technology is quite clear and almost unarguable... Yet, with valuations so extended, many investors have been averse to adding exposure of late. The recent pullback has provided a small sigh of relief for valuations, giving the opportunity to gain exposure to a robust and secular theme."

• Goldman Sachs Analysts including Vincent Lin (Neutral on S&P 500 Information Technology Index):

  "Earnings overtook sentiment."