Why are large US tech stocks starting to underperform?

US President Donald Trump was elected to his second term on November 5 – a memorable date in more ways than one. He was then sworn in on January 20 and swiftly released a range of policies by decree.  

Many of his policies reverse long-term investment trends. The more dramatic policies, such as US immigration control and measures to end the wars in the Middle East and Ukraine, have limited implications for equity markets. Others, such as his campaign against net zero, his plan to fabricate advanced semiconductors on the US mainland and new public health policies from Robert F Kennedy, are moving stocks and sectors.  

Some investors have assumed his plans will be followed through, others that he is bluffing, others that there will be an effective counter to these policies from other governments, and many just wish he would go away and shut up.

As his term started with the global index very heavily weighted towards a few large US technology companies, investors in index funds are very exposed to moves in these correlated stocks. 

Active equity fund managers tend to select a more balanced range of investments offering more obvious value and more spread around the world. These are conditions in which active fund managers should outperform the index and justify their fees.  

Equity trends over the last quarter: Europe takes the lead

First of all, it is worth noting that the big markets that usually react to political changes have been very quiet. The US 10-year bond yield has not changed in three months and the dollar hardly moved against sterling. This is despite tariff threats, worries about US funding and tax cuts. The UK 10-year bond yield has risen modestly, from 4.4 per cent to 4.6 per cent, reflecting the chancellor’s spending pressures.

The star performer among global equity markets has been Europe. For many years value investors had identified the lowly valuations of the European indices. These are explained as principally reflecting the high weights of technology companies in the US index and the high weight of banks in Europe.  

It is European banks that have dominated the rise in the index. Banco Santander shares are 34 per cent higher and HSBC 21 per cent. Also luxury goods shares have recovered despite their China sales continuing to be dull; Louis Vuitton shares are 20 per cent higher and Richemont (which makes Cartier watches, among other things) 52 per cent higher.

US equities lagging for once

The magnificent seven US technology stocks have lagged for the first time for many years. Many of these shares saw sharp price falls when the DeepSeek AI model was recognised as a competitor. Since then the management teams have been busy justifying their massive capital expenditure plans, and lack of visible revenue growth resulting from it (so far).  

Microsoft shares have not risen over the past quarter and Nvidia, after a rise, sharp fall and partial recovery, is also now unchanged over that period.  

Investors have noted the massive capital expenditure plans of Microsoft, and that this money is entirely to fund expansion in the AI space, and will not offer much reward for the rest of Microsoft’s business, while profits from the AI division remain more a hypothesis than a reality. 

Amazon and Alphabet shares on the other hand have continued to perform well, perhaps because their capital expenditure on AI seems to be money that these businesses would have had to spend to support their core shopping and search businesses, so the AI capex brings a tangible benefit to shareholders today, as well as the potential for AI to be accretive in future. 

While Nvidia shares have not risen further, it is notable that Broadcom shares have risen 39 per cent over the quarter, perhaps reflecting a view that Nvidia chips were required for the ‘training’ period in AI and Broadcom custom ASICs chips will be in demand as specific applications are developed. 

Intel has also risen sharply as it is seen as part of ‘Make American Great Again’ by making semiconductors onshore – both Broadcom and Taiwan Semiconductor seem willing to help guide the company towards making better management decisions. 

The cybersecurity software stocks have also performed very well over the quarter, with Fortinet 23 per cent higher.  

It is perhaps a little surprising that US smaller companies have not taken up the running now the magnificent seven have stumbled. US smaller companies (large by our standards) tend to be on lower valuations and have a more domestic focus, avoiding tariff issues. 

US employment levels continue to be high as does consumer confidence, yet this group of stocks has had a cautious period under the early months of Trump 2.0.

One other group of US stocks that have performed well are the entertainment stocks. Both Netflix and Spotify announced very strong operating results and analysts can now see plenty of cash flow in prospect in these companies.

Netflix in particular has shown a capacity to raise its prices without reducing demand for the service. 

Huge forgotten market in the East

A few years ago global equity investors could not stop talking about their high weightings in Chinese shares. Then the Chinese property market broke, the economy slowed and consumers and investors ran for cover. As ever, parts of the market then started to recover.  

The Hang Seng index is nearly 20 per cent higher over this quarter (though the Shanghai index has risen little). This rise is principally due to their technology stocks – Alibaba, Tencent and Baidu – now being seen as potential players in AI. 

President Xi hosting a public meeting with the country’s business leaders, including Alibaba co-founder Jack Ma, shows that they are back in the fold – a far cry from when the Ant Financial IPO was called off five years ago and Beijing seemed uncomfortable with very successful technology entrepreneurs.

Lastly, the Japanese market has had a quiet period, notable mainly for the financials stocks rising in anticipation of further rate rises. With the Japanese inflation rate recently at 4 per cent – double that of the UK – and interest rates at 0.75 per cent – a fraction of UK rates – it seems very likely the next few months will see further interest rate increases in Japan.

And for the future?

The next stage for equity markets may involve the continued questioning of the merits of the magnificent seven shares.  

Investors in those companies have many years of profits, technology is an unpredictable area by its nature, as the DeepSeek announcement illustrates.  

Those companies comprise around a quarter of the value of the global index, so a small amount of profit-taking in these allows a large amount of buying of a broad range of stocks that have been left behind.  

That may help explain the strong performance of European stocks this year, profits from US tech being redeployed into cheaper parts of the market. 

Some will hope that the Chinese economy will start to recover – doubtless it will, but it could take some time.  

Some will prefer to balance their portfolios with less expensive looking UK and European companies. Many hope these economies will suddenly find a magic formula to stimulate higher growth, but it is hard to see a clear path to this, especially as many countries will be spending more on defence, further limiting public sector investment in economic projects.

The global equity bull market that started after the 2008 financial crisis continues. If this year continues to see a broader range of stocks leading the markets higher, that would be a healthy development and would reduce signs of imbalance. 

It would also be a period where stock-pickers should be able to show their value by building portfolios different from the index that perform better than the index (after costs). Feel free to hold them to account.

The bulk of the investments recommended in this article are held in the two Goshawk funds I run.

Simon Edelsten is chair of the investment committee at Goshawk Asset Management