ETFs: Tech stocks holding 'very, very narrow leadership' in markets, expert explains

ETF Think Tank Director of Research Cinthia Murphy joins Yahoo Finance Live to discuss the state of the market, the debt ceiling, inflation, tech stocks, AI, and rate cuts.

Video Transcript

- It's been a choppy month for markets, between the Fed decision and the debt ceiling showdown. Investors are showing, though, signs of what our next guest says is, quote, "tepid bullishness." Joining us now is ETF Think Tank Director of Research Cinthia Murphy for this ETF Report brought to you by Invesco QQQ.

So let's get right into this, Cinthia. Tell us about the leadership. Where is the leadership right now in this kind of market?

CINTHIA MURPHY: Yes, to your point is choppy market is the best way we can describe. We have-- the numbers are looking somewhat positive. And it's fueling this sense that maybe things are better. We saw at the last statement from the Fed that maybe we're coming to the end of this really difficult period.

And so we see some momentum there. But when you look at actually what's leading the markets higher, the S&P 500 and NASDAQ 100, I mean, we're talking about five or six stocks that are doing all the heavy lifting-- companies like Apple, like Microsoft. So it's a very, very narrow leadership.

And you see that in volume. You see that in even ETF flows. I mean, people tend to turn to ETFs when it's a difficult market to navigate, because you can be very tactical. You can be very nimble.

And if you look at just the amount of money going into ETFs so far this year, we've picked up about $110 billion, that's 40% less than we saw at the same time last year. So the inflows are slower, which tells people are very cautiously optimistic about what's ahead because of all the headwinds we see in front of us-- this debt ceiling conversation, the inflation that came down a little bit, but it's still sticking around 5% and not really budging.

And so there's a lot of concern about, is there a recession coming? So it's one foot in, one foot out right now on this market.

AKIKO FUJITA: So we always hear about narrow-- you mentioned narrow leadership, but the key, I would imagine, in a market like this is really diversification. You mentioned sort of a slower inflow right now, but where are those inflows going?

CINTHIA MURPHY: So for the most part of the year, it has really gone into two places, fixed income and international equities as a better value play relative to the US. In the last week to two, we actually saw money going back into your tech, your growth names, your QQQ, your XLK and XLC, tech and communication services, which are the sectors leading the S&P 500.

So we're seeing a little bit of enthusiasm over the growth names. And it's not clear why, because if things go the way they are, if recession hits, these companies are on the line to have some pain ahead. But there's so much enthusiasm over artificial intelligence. There's a sense of things happening in this space.

Their earnings haven't been disappointing, necessarily, in the tech space so far. Maybe it's because they've had a lot of layoffs. But the point is the numbers look somewhat supportive.

So we're seeing some money go back into the riskier part of the market in terms of your tech names, your big growth names. But we have to see if that's going to stick. You know, I think this debt ceiling conversation is going to give us a better sense of what happens to the risk free rate going forward. And then we'll see if people will resume to their fixed income, look for safety, or they're going to put both feet in and pursue the growth, the riskier assets.

- Cinthia, where do you think that move into growth is coming from? What's fueling it from your point of view?

CINTHIA MURPHY: I think it's two things. One is right now, the market is pricing that we're going to see a rate cut already this year. The last I read was, like, 99% chance of a rate cut rate. Rate cuts would really be supportive for the growth names, which have been kind of in the back burner because we've been in a rate hike scenario. I think all this conversation of innovation, all this enthusiasm of AI could be also supportive for the space.

There's a sense that it's a sector that's still out there. It's innovating. There's new things coming. So this is where growth is going to come from. This is where the opportunity is.

And then earnings haven't looked bad. So far, no company in the tech space has really disappointed or surprised dramatically on the downside. But there's also been a lot of layoffs. So I think it's just a way people are-- maybe we're willing this market higher. We want to be past this phase.

But it's unclear whether we are going to get away without a deep recession or not. So it's kind of tentative right now.

AKIKO FUJITA: Yeah, so let's look on the opposite side of the spectrum. Energy the best performing sector last year. We've seen significant pullback this year. What are you seeing in terms of inflows for ETFs there?

CINTHIA MURPHY: Yeah. Energy and financials are really struggling right now. We're seeing a lot of money coming out of that space. And it's really last year's play, not this year's play.

But what's interesting is if you look at these more defensive plays, you see gold is an interesting story because you have gold and Bitcoin, which you could argue both of them kind of playing the same playground. And you have both of them doing really well this year.

And one is your absolute safe haven play, the other is your super risky volatile play. It's a very risky asset, but they kind of both are combating this concern about banking crisis, financial concerns. So it's really interesting, because if we are to kind of try to summarize market sentiment, it's really impossible, because you have both bulls and bears pulling on both sides. And it's really so data dependent at this point that every day we have a data point, everybody's watching to see what comes next.

AKIKO FUJITA: ETF Think Tank Director of Research Cinthia Murphy, good to talk to you today. Appreciate you stopping by.

CINTHIA MURPHY: Thanks for having me.