Investors are navigating a sharply divided market as fund flows reveal a clear shift in risk appetite. Data through August 12 shows U.S. growth funds attracted $8.78 billion, their largest influx since November 2024, while technology-sector funds experienced $4.62 billion in outflows, ending a six-week streak of gains. Meanwhile, the Energy Select Sector SPDR Fund (XLE) surged 7.7% last week, marking its strongest performance in four years.
The divergence underscores a broader rotation: investors are still seeking earnings growth but are trimming positions in heavily owned technology stocks. Energy has emerged as a short-term hedge against rising oil prices and geopolitical uncertainty, with Brent crude climbing 5.7% last week. This rotation is set to be tested this week as major retailers and chip companies report earnings.
U.S. equity funds saw net inflows of $2.58 billion, rebounding from a $1.36 billion outflow the previous week. Value funds attracted $1.79 billion, while sector-specific funds posted outflows of $3.78 billion. The contrast highlights a preference for broad-based equity exposure over sector bets.
Bond and Money-Market Funds See Inflows
Portfolio protection remains in demand. Bond funds recorded $9.40 billion in inflows, and money-market funds attracted $13.92 billion, indicating that investors are keeping liquidity high despite the equity market's resilience. Short and intermediate investment-grade funds took in $2.98 billion, while government and Treasury funds saw $1.92 billion in inflows. Yields on the two-year Treasury closed around 4.16%, with the 10-year near 4.69%, reflecting cautious sentiment.
Tech Sector Faces Scrutiny
Technology continues to drive earnings growth, but the margin for error has narrowed. Broadcom (AVGO) dropped 5.9% on Friday, and Applied Materials (AMAT) fell 5.1%. The iShares Semiconductor ETF (SOXX) ended the session down 1.1%, and a widely tracked software ETF lost 1.5%. Thomas Martin, senior portfolio manager at GLOBALT, noted that expectations were high for semiconductor-equipment firms to exceed and raise guidance, and some investors are showing increased caution around various AI segments.
Holding-weighted analyst estimates still support certain tech ETFs, but these figures compile analysts' recommendations and price targets for underlying stocks, not direct fund ratings. The iShares Semiconductor ETF (SOXX) carries a Strong Buy consensus with about 18.0% implied upside, while the iShares Expanded Tech-Software Sector ETF (IGM) shows about 25.2% implied upside, suggesting potential for a rebound in software. The Technology Select Sector SPDR Fund (XLK) has a modest 3.2% implied upside, reflecting limited near-term headroom.
Upcoming Earnings Catalysts
This week, retail and semiconductor earnings will be in focus. Home Depot (HD) reports on Tuesday, followed by Target (TGT) and Analog Devices (ADI) on Wednesday. Home Depot's results will gauge demand for higher-priced goods, while Target's earnings will reveal whether promotional expenses are pressuring margins. Analog Devices' outlook will indicate if broader demand for cyclical chips is emerging. These reports will influence consumer, housing, and semiconductor ETFs.
Oil and geopolitical events remain wildcards. A further surge in crude prices could extend energy sector outperformance but squeeze consumers, while a sharp decline would hurt recent energy investors. Disappointing retail outlooks could shift the ongoing rotation into a wider risk-off move.
The Federal Reserve remains the key cross-asset pivot. Futures as of Friday implied a 67% chance that rates will stay unchanged in September. Stronger inflation or growth signals could push yields higher and weigh on long-duration tech funds.
For now, fund flows indicate selectivity. Investors are buying growth stocks but not across the board. The sustainability of this trend will depend on the upcoming earnings wave and how the market balances growth potential against valuation and macro risks.
