Surprised? Whether it's public funds or hedge funds, U.S. institutions generally "underweight" technology stocks

Despite technology stocks being the main driving force behind the market's rise this year, mainstream institutional investors in the United States have generally chosen to keep their distance.

According to news from the Wind Trading Desk, a recent report by Goldman Sachs analyst Sean Watkin shows that in the second quarter, U.S. institutional investors currently have a significantly low allocation to technology stocks. The underweighting of the information technology sector by public funds has reached a historical record, and the allocation of hedge funds to technology stocks is also at its lowest level since 2024.

The report indicates that the sectors most overweighted by public funds and hedge funds are healthcare and industrial stocks. In contrast, both types of institutions have significantly underweighted the TMT (Technology, Media, Telecom) sector.

In the second quarter, both types of institutional investors increased their holdings in the financial sector, which dominated the list of popular stocks among hedge funds. Capital One has become a star stock that both public funds and hedge funds have significantly increased their holdings in.

Public Funds' Underweighting of Technology Stocks Hits Historical High

The cautious attitude of public funds towards technology stocks has reached unprecedented levels.

Data from the report shows that public funds currently have a historically low allocation to the information technology sector. Hedge funds are also maintaining a cautious stance towards technology stocks, with their underweighting at the highest level since 2024.

The report states that this consistent underweighting strategy indicates that institutional investors generally believe that technology stocks face valuation pressure or risks of slowing growth.

Notably, Alphabet, the parent company of Google, as one of the tech giants, not only appears on the list of the 20 stocks most reduced by public funds but also ranks among the "falling stars" with the largest decline in holdings by hedge funds.

Divergence in Holdings of the "Magnificent 7" Technology Stocks

In terms of the highly watched "Magnificent 7" technology stocks, public funds and hedge funds are exhibiting starkly different strategies.

Public funds have further expanded their underweighting of the "Magnificent 7," increasing from 723 basis points in the first quarter to 819 basis points, and have reduced their holdings in all seven stocks to varying degrees.

Hedge funds, on the other hand, have reversed a trend that lasted for years, beginning to increase their overall exposure to the seven giants. The weight of the seven giants in hedge fund long portfolios rose from 11.8% in the first quarter to 12.8%.

However, hedge funds have shown significant divergence at the individual stock level: they reduced their holdings in Meta and Alphabet while increasing their holdings in Nvidia, Amazon, and Apple, with Tesla re-entering the hedge fund VIP list for the first time since 2022.

Data from the report shows that since 2013, the annualized average return of the stock combinations held simultaneously by public funds and hedge funds among the "Magnificent 7" has been 16%, higher than the 12% of the S&P 500 index.

However, this excellent performance also corresponds to higher valuations, with the expected median price-to-earnings ratio of this combination at 29 times, far exceeding the 19 times of the S&P 500 index constituents.

Financial Sector Favored by Institutions

The report also shows that in the second quarter, both public funds and hedge funds showed strong interest in the financial sector, increasing their allocation efforts. The financial sector dominates the list of popular stocks increased by hedge funds, indicating institutional investors' optimistic expectations for the sector's prospects.

In terms of specific stock selection, First Capital performed the best, becoming the stock with the largest popularity growth based on net holding changes measured by both types of fund managers. Additionally, financial stocks such as Fidelity National Information Services, Nu Holdings, and SouthState have also made it onto the hedge funds' "new star" list.

Currently, there are only 7 stocks favored by both public funds and hedge funds, including AppLovin, CRH, Mastercard, Charles Schwab, Spotify, Visa, and Vertiv. The combination of these individual stocks has outperformed the S&P 500 index by 11 percentage points year-to-date