Investors are shifting focus from mega-cap tech giants to smaller U.S. technology stocks as the AI boom broadens. The Invesco S&P SmallCap Information Tech ETF has seen $49.7 million in inflows this year after four years of outflows, signaling renewed interest in companies poised to benefit from AI adoption.
"The AI trade has broadened quite materially," said Oren Shiran, portfolio manager at Lazard. "Small-caps have become a real part of the second and third order of AI."
The S&P 600 small-cap tech index has surged nearly 54% this year, outpacing the S&P 500 technology index's 20.1% gain - the widest gap since before 1995, according to Trivariate Research.
Top performers include network testing firm VIAVI and semiconductor company MaxLinear, which posted a 43% revenue jump citing hyperscale customer demand. Shares of MaxLinear, VIAVI, Ultra Clean, and Vishay Intertechnology have all more than doubled this year, though their profitability has been inconsistent.
However, some analysts warn the rally may be fueled by speculation rather than fundamentals. "The price of small-cap tech stocks has more to do with speculation and less on changes in fundamentals relative to large-cap stocks," said Hal Reynolds of Los Angeles Capital Management.
Higher bond yields also pose a risk for these debt-dependent companies. While small-cap semiconductor firms are expected to post nearly 40% profit growth in Q2, broader small-cap tech earnings are forecast at just 7%, excluding bitcoin miner MARA Holdings.