Amid the escalating conflict in Iran, investors have increasingly turned to US tech stocks as a refuge from the turbulence, moving away from sectors perceived as vulnerable to energy shocks. Since the conflict began, technology has emerged as the best-performing sector in the S&P 500, showing a 1.5 percent rise from the market close on February 27, the day before the onset of US-Israeli bombardments. In stark contrast, every other sector in the index has faced declines as global investors reconsidered their positions amidst broader concerns.
The technological sector’s turnaround has been significant. Prior to the outbreak of hostilities, major tech companies struggled with investor sentiment, primarily due to fears regarding massive spending and the potential disruptive impact of artificial intelligence on various industries. This resulted in a more than 6 percent drop in the index tracking the so-called “Magnificent Seven” tech giants during the first two months of the year.
However, the surge in global energy prices following the conflict has shifted investor perspectives. The index tracking these tech giants has now risen over 1 percent since the hostilities began, contrasting sharply with the overall decline in the US stock market and other global indices. “In an uncertain environment where the outlook for inflation and growth is less clear, at least we know these big tech companies are growing, generating profits, and providing cash,” said Michael Walsh, a multi-asset portfolio manager at T Rowe Price. This has made technology stocks attractive alternatives to sectors like banking and materials, which are seen as more vulnerable to economic downturns.
The S&P 500 banks sub-index is down 3.4 percent since the onset of the conflict, while the materials sub-index has dropped nearly 7 percent. Industry experts indicate that technology will likely maintain its status as a defensive asset during this period, as it is less affected by energy price fluctuations compared to other sectors. Manish Kabra, head of US equity strategy at Société Générale, noted the absence of a direct impact on tech from energy intensity challenges.
Investor sentiment has also shifted in recent weeks, leading to the rise of a new “Halo” trade that favors stocks characterized by “heavy asset, low obsolescence” profiles, presumed to be insulated from AI disruptions. However, the shock in energy prices exposed vulnerabilities in these sectors, as heavy assets require significant energy resources and are thus more susceptible to energy volatility.
Following the increased volatility stemming from the US-Israeli strikes, many investors began repositioning their portfolios, unwinding concentrated short positions predominantly in the software sector. “Hedge fund shorts on software were very large, and there’s a chance some of that got washed out,” remarked Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs. A report from Goldman Sachs indicated that between February 27 and March 5, technology emerged as the most significantly net-bought global sector, primarily driven by risk unwinds and short covering.
As investors reevaluated their strategies, some analysts upgraded the outlook for the technology sector, including software, with Deutsche Bank specifically moving the sector from underweight to neutral. They expressed that concerns over AI disruption had peaked and noted that software is relatively insulated from escalating oil prices due to its lower energy consumption requirements.
However, with indications that the US government is eager to resolve the conflict, there is speculation that market focus could quickly shift back toward the potential risks posed by AI disruptions. “That’s what the market was obsessing about barely a week ago, and I don’t think that’s fundamentally changed,” added Mike Fox, head of equities at Royal London Asset Management.
