U.S. stocks changing? "Tech Seven Giants" falling to "Weak Seven", low allocation funds counterattack to achieve the best performance in ten years.

Since the global financial crisis, stock pickers have reduced their holdings of large stocks such as Apple Inc. (AAPL.US) and NVIDIA Corporation (NVDA.US) to the lowest levels. In this year of decline for tech stocks, this strategy unexpectedly boosted their fund performance. For over a decade, active fund managers have struggled to outperform the indices they track, mainly because their positions in the large tech stocks driving the market higher were lower than the high weights of these stocks in indices like the S&P 500. This gap still existed at the end of December 2024. Strategists at Morgan Stanley stated that at that time, by market value, the average gap between the holdings of active institutions in the largest US tech companies such as Apple Inc., NVIDIA Corporation, Amazon.com, Inc. (AMZN.US), Alphabet Inc. Class C (GOOGL.US), Meta Platforms (META.US), and Microsoft Corporation (MSFT.US) and the weighting of these companies in the S&P 500 index was at least the largest in 16 years. However, this year, this underweighting has turned into a blessing in disguise. With the decline of the so-called "Big Seven," active investors' performance is improving. According to Morningstar Direct, about 49% of actively managed mutual funds and exchange-traded funds compared to the S&P 500 Index are expected to outperform the index in 2025. This percentage is higher than the 38% at the same time last year, far exceeding the excellent performance level of 17% over the past decade. George Cipolloni, portfolio manager at Penn Mutual Asset Management, said: "As the 'Strong Seven (Mag 7)' have become the 'Weak Seven (Lag 7) this year,' active fund managers are breathing a sigh of relief because traders are turning to distressed value stocks and other unpopular areas of the market." High market concentration can affect stock pickers' performance comparisons, as they often must limit stock allocations for reasons such as maintaining diversification and managing risks. Data from Birinyi Associates showed that last year, the market value of the S&P 500 Index increased by $10 trillion, two-thirds of which was contributed by 10 companies. So far this year, large tech stocks have underperformed. By the close on Tuesday, the Bloomberg Big Tech Index had fallen 11% from its high on December 17th, amidst concerns about an economic slowdown and rising inflation. At the same time, data compiled by Bank of America Corp's stock and quantitative strategist Savita Subramanian showed that about 63% of actively managed large-cap stock funds outperformed their benchmark in January, the largest outperformance of the market in a year. On Wednesday, large tech companies will face their biggest test of the earnings season, with artificial intelligence darling NVIDIA Corporation set to report earnings after the market closes. The chip manufacturer saw a 170% increase in 2024, a significant driver of the rise in the S&P 500 Index, but has fallen nearly 6% this year. Another factor that may have helped active fund managers in recent weeks is the decrease in the frequency of stock market synchronous movements, with one of the indicators measuring the degree of stock market synchronous movements - the Cboe Global Markets Inc 3-month implied correlation index - nearing historic lows. Some market participants believe that this environment can give stock pickers an advantage, as individual stocks are more likely to chart their own course rather than getting caught up in macro rotations that sweep the entire market. However, the weakness of tech stocks in recent years is just a temporary phenomenon. The Russell 1000 Value Index (which includes leaders like Walmart Inc., Procter & Gamble Company, and Philip Morris International Inc.) has risen by 25% over the past 24 months. In comparison, the Russell 1000 Growth Index has only risen by 74%, a negligible increase. Adam Sarhan, founder of 50 Park Investments, stated: "The biggest risk for active managers is that market pressure eventually fades, and the US 'Big Seven' rebounds, as we have seen time and time again. I think from now on, tech is going to face more downside - but if NVIDIA Corporation succeeds, everything could change."