The shift in market dynamics in July as the value of stocks in AI and tech companies experienced a significant drop off highlighted the importance of diversification for long-term investors, LGT Wealth Management has noted.

The first half of 2024 was characterised by the concentration of gains in a few stocks, especially in AI firms and the ‘Magnificent Seven’, a group of high-performing tech companies in the US stock market.

Nvidia alone added US $1trn in market cap in H1 and accounted for 35 per cent of the S&P 500’s gains in June, driven by the chipmaker's prominence in the AI market.

However, there are “encouraging signs” that a reversal of the concentration in equity markets was starting to take hold, LGT stated.

“Whether due to concerns about the US economy stalling or the implosion of the yen carry trade – where investors borrow in Yen and purchase US assets and equities - as the Japanese currency rallied some 18 per cent in the space of three weeks, it seemed that investors needed an excuse to sell off the highly valued AI and Magnificent Seven stocks,” the firm added.

In July, stocks from the Magnificent Seven fell by more than 20 per cent from their peak, initially resulting in investors purchasing assets and sectors that had been less popular since the start of the year.

Furthermore, the Russell 2000 and S&P 500 Equal-Weighted index outperformed the S&P 500 by more than 5 per cent since the Magnificent Seven peaked on 10 July, which LGT said underscored the extreme rotation that has occurred since then.

Recent US inflation data has provided investors with confidence that interest rate cuts could bolster the economy, resulting in increased investment in bonds and companies that could benefit from falling interest rates, paving the way for equity rotation, according to LGT.

“Republican presidential nominee Donald Trump fuelled the latest technology sell-off in mid-July after stating that Taiwan should pay the US for its defence, which sent the benchmark Philadelphia Semiconductor index down as much as 28 per cent from its peak, before recovering in recent sessions,” LGT stated.

“At the start of this year, tech companies were optimistic, telling the market that AI would substantially boost sales and earnings for the foreseeable future. However, more recently, we have seen a marked change in messaging from these very same tech businesses – they are now suggesting that the AI pay-off will take longer than initially expected.”

These market shifts in recent weeks have reaffirmed LGT’s view that diversification is the best way to preserve and grow investor capital.

The firm noted that while US companies and tech will likely drive equities for the foreseeable future, it remained focused on investing in a diverse range of ‘quality’ companies.

“We believe this is essential for all long-term investors, as AI will benefit a growing number of companies,” LGT continued.

“Although the dominance of some mega tech companies may be starting to diminish, few expect the tech rally to fade completely. It is more likely that other companies will catch up as borrowing costs decrease, ultimately bolstering the economy.”

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