In recent months, small-cap technology stocks in the United States have seen a remarkable surge, driven by investor interest in artificial intelligence (AI) opportunities beyond the well-known giants like Nvidia and Intel. This trend highlights a shift in focus towards smaller companies that are poised to benefit from AI adoption.
The Invesco S&P SmallCap Information Tech ETF, which had been experiencing outflows for four consecutive years, has attracted $49.7 million in inflows this year, according to data from LSEG Lipper. This influx of investment reflects a growing confidence in the potential of small-cap tech firms to capitalize on AI advancements.
Broadening AI Trade
Oren Shiran, portfolio manager for Lazard US Systematic Small Cap Equity ETF, noted that the AI trade has expanded significantly, with small-cap stocks becoming integral to the second and third tiers of AI development. These smaller companies offer promising earnings prospects, attractive valuations, and a diverse range of businesses related to AI infrastructure, such as chipmakers, data center suppliers, and network equipment manufacturers.
The S&P 600 small-cap tech index has surged nearly 54% this year, outpacing the 20.1% rise in the S&P 500 technology index. This marks the widest gap between the two indices since before 1995, according to Trivariate Research.
Speculation and Challenges
Despite the strong performance, there are concerns about a potential AI bubble, with some analysts warning that speculative trading may be driving small-cap stocks to unprecedented highs. Hal Reynolds, senior portfolio manager at Los Angeles Capital Management, emphasized that the price movements in small-cap tech stocks are more influenced by speculation than by fundamental changes relative to large-cap stocks.
Moreover, rising government bond yields globally could pose a challenge to the sector’s appeal, given the economic sensitivity of smaller tech companies and their reliance on debt-fueled growth.
Performance and Earnings
Small-cap semiconductor companies have been among the top performers, mirroring the impressive rally of their larger counterparts. These companies are expected to post nearly 40% profit growth in the second quarter, driven by significant capital spending on data centers and AI-related infrastructure. However, analysts predict a more modest 7% earnings growth for the broader small-cap tech sector in the next quarter, excluding losses from bitcoin miner MARA Holdings.
Notable performers this year include network test and optical security products maker VIAVI and semiconductor firm MaxLinear, both of which have reported substantial revenue increases. Despite their success, these companies have experienced inconsistent profitability, with fluctuations between profits and losses since their inception.
Overall, while the small-cap tech sector presents exciting opportunities for investors seeking to capitalize on AI advancements, it also carries inherent risks associated with speculative trading and economic factors.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
