The recent rotation back into technology stocks may have further to run, according to Deutsche Bank strategists.
Technology funds attracted approximately $15.6 billion in inflows last week, indicating that investors are once again increasing their exposure to the sector.
A Deutsche Bank team led by Parag Thatte believes hyperscale technology companies currently offer the most attractive balance between risk and potential reward. Their performance relative to the S&P 500 remains close to its weakest level in three years, potentially creating a more favourable entry point.
Technology Stocks Recover After a Sharp Pullback
The positive outlook follows a difficult period for large technology companies.
According to data reported by Reuters on July 29, the Magnificent Seven ETF had fallen by more than 8% from its record high reached in early June.
Semiconductor stocks suffered an even larger correction. The Philadelphia Semiconductor Index declined by more than 19% over the same period.
Weakness across megacap technology and chip stocks also affected the wider market. The S&P 500 dropped by more than 2% from its June 2 level.
Megacap Tech Correction Could Be Healthy
Some market strategists view the recent technology sell-off as a constructive development rather than the beginning of a prolonged downturn.
Nationwide chief market strategist Mark Hackett noted that the broader stock market remained relatively stable despite the aggressive decline in the Magnificent Seven.
In his view, this suggests the market has been able to absorb the technology correction without developing into a broader bear market.
A controlled pullback can reduce excessive valuations and speculative positioning. It may also create new opportunities for investors who previously considered major technology stocks too expensive.
Investor Positioning Remains Cautious
Deutsche Bank reported that overall equity positioning remained slightly below neutral last week.
Discretionary investors, including actively managed funds, continued to hold significantly less exposure to equities than usual. In contrast, systematic investment strategies remained overweight stocks.
This difference suggests that many traditional investors remain cautious, even as computer-driven strategies continue to favour equities.
Volatility Funds Reduce Their Stock Exposure
Within systematic strategies, volatility-control funds reduced their equity allocations closer to neutral levels.
These funds typically adjust their stock exposure based on changes in market volatility. When volatility rises, they often reduce risk. When markets become more stable, they can gradually increase their equity holdings.
Commodity trading advisers, commonly known as CTAs, maintained positioning near the upper end of their historical range.
Therefore, systematic investors remain relatively optimistic, although some volatility-sensitive strategies have become more cautious.
Equity Fund Inflows Reach a Six-Week High
Fund-flow data shows that investors are moving more money back into risk assets.
Global equity funds attracted approximately $63.7 billion in inflows during the week. This was the highest total recorded in six weeks.
US equity funds led the increase, receiving around $30.4 billion. Chinese equity funds followed with approximately $16 billion in new investment.
The figures suggest investor appetite for stocks is recovering after a period of market uncertainty.
Technology stocks received a significant share of these flows, supporting Deutsche Bank’s view that the sector rotation may still be in its early stages.
Hyperscalers Offer Attractive Risk-Reward
Deutsche Bank believes hyperscalers may provide the strongest opportunities within the technology sector.
Hyperscalers are large companies that operate extensive cloud-computing and artificial intelligence infrastructure. The category generally includes major technology businesses with the financial resources to invest heavily in data centres, advanced chips and AI development.
These companies have faced concerns about high capital expenditure and whether their AI investments will generate adequate returns.
However, their recent underperformance relative to the S&P 500 may mean that some of these risks are already reflected in their share prices.
Bond and Money Market Inflows Weaken
While investors increased their exposure to equities, demand for more defensive assets softened.
Bond funds received approximately $12.5 billion in inflows. Although this remained positive, the total continued to weaken compared with previous weeks.
Money market funds attracted only around $5 billion. This followed substantial withdrawals during the previous two weeks.
Lower demand for cash-like investments may indicate that investors are becoming more comfortable taking market risk.
Is the Technology Rotation Just Beginning?
The combination of strong equity inflows, reduced technology valuations and cautious active-investor positioning could provide further support for the sector.
If discretionary investors begin rebuilding their technology exposure, additional capital could flow into megacap stocks, semiconductor companies and AI-related investments.
However, several risks remain. High valuations, rising AI infrastructure costs and uncertainty surrounding future interest rates could still create volatility.
Technology companies will also need to demonstrate that their large AI investments can produce sustainable revenue and profit growth.
Final Outlook
Deutsche Bank believes the rotation into technology stocks is only beginning.
The sector attracted $15.6 billion in weekly inflows, while overall equity fund demand reached its highest level in six weeks.
Hyperscale technology companies may offer particularly attractive opportunities because their relative performance against the S&P 500 remains close to a three-year low.
Although the recent correction has been significant, the broader market has remained comparatively resilient. This could indicate that the sell-off has improved market conditions rather than damaged the longer-term technology outlook.
