Hedge funds ramp up Nasdaq bets as AI rally pushes tech stocks to fresh highs

Hedge funds have been boosting their bets on US technology stocks as the Nasdaq Composite inches closer to record highs, driven by optimism about the artificial intelligence (AI) boom, according to Bloomberg. The Nasdaq 100 index hit a fresh high on Tuesday, recovering from a significant downturn this year that left it more than 10% below its previous peak.

Investments in technology-focused exchange-traded funds (ETFs) have surged, with $22 billion poured into tech ETFs during the third quarter, compared to $4.6 billion flowing into non-tech equities, as per Bloomberg Intelligence data. Hedge funds have also raised their long positions in Nasdaq 100 futures to the highest level since December, signaling confidence in the sector's earnings potential.

However, investors are cautious about various risks, including inflation, monetary policy, and geopolitical tensions. The rally in tech stocks is supported by strong earnings expectations for major tech companies, which have propelled the broader US equity market. Despite this, some analysts are questioning whether investor sentiment has outpaced the actual earnings outlook, as market breadth has weakened, with a notable number of S&P 500 companies touching new 52-week lows.

The performance of the technology megacaps is crucial to sustaining the broader market uptrend, and investors are now keenly awaiting third-quarter earnings reports to gauge the impact of AI investments on corporate profits. Expectations are that technology companies in the S&P 500 will see profit growth of around 64% in Q3, compared to a 24% increase across the entire index.

Nonetheless, the AI-driven rally is being scrutinized against the backdrop of ongoing uncertainties around interest rates and inflation, as investors are wary of the potential adverse effects of restrictive monetary policy, reminiscent of the Federal Reserve's aggressive rate hikes starting in 2022.