Tech Giants Face 16-Year Low in Fund Holdings, Potential Rebound Ahead

Major technology stocks, including Google, Amazon, Apple, Meta, Microsoft, and Nvidia, are currently experiencing the most significant underweighting by actively managed funds in 16 years. This underweighting has widened further in the second quarter, with the disparity between these funds' portfolios and the weightings of the S&P 500 Index increasing. The primary reason for this underweighting is the concentration risk that arises when funds hold multiple related stocks, leading to a reduction in their overall exposure to these tech giants.

Analysts at Morgan Stanley suggest that this underweighting could present a potential buying opportunity. Despite the current underweighting, the tech giants continue to hold significant weight in major indices. This suggests that as the market stabilizes and regulatory concerns are addressed, institutional investors may start to reallocate funds back into these tech stocks. This rebalancing could provide a significant boost to the sector, driving prices higher as demand for these stocks increases.

The underweighting of tech stocks by institutional investors is a reflection of the broader market sentiment towards the sector. While the tech giants have historically been a driving force behind market growth, recent challenges have led to a more cautious approach. For instance, Apple's underweighting is primarily due to revenue growth slowdown and multiple headwinds, including geopolitical tensions and regulatory pressures. However, Morgan Stanley analysts remain optimistic about Apple's prospects, citing three key factors: the successful avoidance of potential tariff impacts, strong product and service profitability, and strategic advancements in artificial intelligence.

Despite the underweighting, some tech giants have outperformed the S&P 500 Index. Microsoft, Meta, and Nvidia have seen their stock prices rise, while Google, Apple, and Amazon have lagged behind. Meta, in particular, has been in a state of overweighting for most of the past four years due to its stable performance. However, its current holdings are now below the index weight, indicating a potential for future growth.

As of the second quarter, the overall holdings of large-cap tech stocks are approximately 140 basis points lower than the S&P 500 Index weight, an increase from the 115 basis points difference at the end of the first quarter. This suggests that there is still room for institutional funds to increase their holdings, potentially providing a new upward momentum for tech stocks in the future.