Key Takeaways
- Semiconductor-related stocks experienced substantial outflows last week, while software attracted fresh investment.
- Historical analysis suggests broader market returns have been more modest when the S&P 500 outperforms semiconductor stocks.
- Utilities are gaining momentum in the US and Canada, while energy remains a relative market leader.
Is the semiconductor rally running out of steam?
In the October 28 edition of Markets in Motion, StoneCastle Investment Management’s Bruce Campbell examines a shift in technology investment flows and what it could mean for the broader US stock market.
Recent data from Money Flows shows investors directing capital towards software stocks, while hardware experienced relatively balanced inflows and outflows. Chips, optics and equipment, however, recorded significant outflows with little corresponding buying activity.
The trend aligns with Campbell’s analysis of the S&P 500 and semiconductor stocks, which suggests the broader index is beginning to outperform a sector that has previously been an important driver of market momentum.
This article is being disseminated on behalf of StoneCastle Investment Management, a third-party issuer, and is intended for informational purposes only.
Looking at historical performance since 2015, Campbell found that periods favouring the S&P 500 produced average index returns just below 10 per cent, with semiconductor returns slightly lower.
By comparison, periods of semiconductor leadership coincided with a more aggressive risk-on environment, including average S&P 500 returns above 20 per cent in his analysis.
That divergence suggests investors may need to moderate their expectations for market gains if semiconductor momentum continues to weaken.
Elsewhere, sector rotation is providing additional clues. Utilities are improving in both the US and Canada as interest rates decline, while Canadian financial stocks are beginning to recover from recent weakness.
US healthcare is showing early signs of weakening, although energy continues to demonstrate relative strength.
Campbell’s analysis doesn’t establish that a market correction is imminent. Instead, it highlights a changing investment environment in which the sectors leading the market may be shifting.
Watch the full video above and join the discussion on iHub. Is the semiconductor trade losing its momentum, or could the sector regain its leadership?