AI, Big Tech Bull Case Endures Despite Nasdaq’s April-Worst Week

Despite the recent volatility that saw the Nasdaq experience its toughest week since April, State Street remains firmly in the bull camp on artificial intelligence, citing sustained investor appetite for growth stories dominating the market this year.

Anna Paglia, Chief Business Officer at State Street, speaking on CNBC’s “ETF Edge” this week, articulated the rationale behind their continued bullish outlook. “It’s difficult to ignore the growth potential inherent in AI technology. While many anticipate a shift from growth to value stocks, the underlying momentum suggests this transition is not yet imminent,” Paglia stated. She added that a substantial rebalancing is unlikely until the market signals a significant deceleration in these dominant trends.

Paglia, a veteran in the ETF industry with 25 years of experience, anticipates a potential cooling of the sector early next year, predicated on a broader diversification strategy among investors.

“We expect a greater emphasis on diversification as investors seek to mitigate risk and capitalize on opportunities beyond the currently favored sectors,” she noted. This anticipated shift reflects a broader understanding of economic cycles and risk management within investment portfolios.

State Street manages a suite of ETFs with exposure to the technology sector, including the SPDR NYSE Technology ETF (XNTK), which has delivered a robust 38% gain year-to-date as of Friday’s close. This performance underscores the significant capital inflows directed towards technology and AI-related assets throughout the year.

However, the XNTK ETF experienced a pullback of over 4% this past week, triggered by profit-taking in AI-linked stocks. A notable example is Palantir Technologies (PLTR), the fund’s second-largest holding as of Friday. The stock plummeted more than 11% following its earnings report on Monday, despite the company maintaining a strong long-term outlook. This price action highlights the inherent volatility associated with high-growth stocks, particularly those heavily reliant on future projections and market sentiment.

Despite the recent price correction in Palantir, Paglia reaffirmed her positive outlook on the technology sector in a subsequent statement to CNBC. While acknowledging potential short-term fluctuations, she emphasized the long-term structural growth drivers supporting technological innovation and adoption across various industries.

Contrasting this view, Todd Rosenbluth, Head of Research at VettaFi, suggests that a sector rotation may already be underway, pointing to a resurgence of interest in healthcare stocks. Rosenbluth noted that the Health Care Select Sector SPDR Fund (XLV), previously out of favor for much of the year, began to regain traction in October.

“The healthcare sector, often viewed as more defensive, is attracting renewed interest as investors seek diversification away from sectors like technology,” Rosenbluth explained. This shift towards defensive positioning reflects growing caution regarding economic headwinds and potential market corrections, as investors reallocate capital towards sectors perceived as less sensitive to cyclical downturns. The Health Care Select Sector SPDR Fund has gained 5% since Oct. 1, outperforming the broader S&P 500. It was also the second-best performing S&P 500 group this week.