Hedge funds ditch chip stocks for software in tech investing U-turn

Fund managers have been net sellers of the AI craze's biggest beneficiaries – is it a tactical pivot or a course change?

Hedge funds made an about-face last week dumping semiconductor stocks — beneficiaries of the artificial intelligence boom — while snatching up software.

Fund managers net sold US technology stocks for the third straight week, according to Goldman Sachs Group Inc.’s prime brokerage desk. Within tech, semiconductors and semiconductor equipment stocks were the most notionally net sold for the week ended June 7, while software names were the most net bought. That’s a reversal from the prior week’s trading strategy.

Both sectors advanced over the five-day span with the S&P Software and Services index logging its best week since January. The gauge has lagged semiconductor peers as well as the broader market with a less than 6% advance in 2024. The S&P 500 Semiconductors and Semiconductor Equipment index continues to set all-time highs on a roughly 67% rally this year.

“Sentiment and positioning in software couldn’t get much worse at this point,” said Richard Ross, senior managing director and head of technical analysis at at Evercore ISI, while pointing to beneficial chart signals for the sector. “I would view any flows into the group as a positive buying opportunity for software (which we endorse), rather than opportunity to trim semiconductors which we continue to recommend.”

The software gauge recently neared a relative strength index reading that would have indicated a rebound was imminent and appears to have some support around its 200-day moving average, Ross added.

Whether last week’s positioning shift was a tactical trade or change of a course remains to be seen.

The divergence came as software stocks largely showed signs of slower growth coming from AI. Investors have instead embraced semiconductor stocks sending them soaring on strong demand amid confidence that Nvidia Corp. and other chip stocks will keep delivering.

Goldman’s Vincent Lin sees “a potential change of stance on an industry level.” The bank said the healthy bounce in software was catalyzed by better earnings from CrowdStrike Holdings Inc. and Guidewire Software Inc. as well as by oversold positioning dynamics.

To Ross and others, semiconductor stocks have room for more gains. Ross sees semis ready to break out again after three months of consolidation, leaving them in prime position for further growth both tactically and structurally.

“Semiconductors still have strong upside momentum relative to software from short- and long-term perspective, so there isn’t enough evidence of a shift in leadership within tech in our work yet,” according to Will Tamplin, senior analyst at Fairlead Strategies.