Technology-sector volatility weighed on equity markets in July. Semiconductor stocks came under significant pressure, with the Philadelphia Semiconductor Index falling 20.6% over the month. The sell-off reflected growing concerns about the sustainability and financing of AI infrastructure spending, intensifying competition from China, and whether hyperscalers can maintain the pace of capital expenditure while converting strong cloud demand into durable revenue growth.
We maintain a constructive outlook on semis amid robust AI demand, but we believe the recent divergence in sector performance is in line with our view that there are more ways to participate in potential market gains than through a narrow set of AI-linked stocks. Indeed, the overall US equity market (S&P 500) fell 0.1% in July, while the equal-weighted S&P 500 gained 0.9%, pointing to a broadening of market leadership beyond the largest companies.
We expect equity markets to move higher as strong earnings broaden beyond AI, but wide gaps in performance between stocks mean portfolio outcomes depend more than ever on what investors own.
We believe investors should ensure their core equity allocation is broadly diversified across our preferred regions, sectors, and return drivers.But with recent market swings, investors may be wondering how best to navigate tech-induced volatility and “buy the dip.”
Here are three ways investors who share our constructive view on global equities can use the recent turbulence to add to stocks in a disciplined way:
Rebalance portfolios. Sharp stock moves may mean portfolios have drifted from their strategic allocations. CIO recommends rebalancing: Sell relative outperformers, buy relative underperformers, and return to long-term asset allocations. This disciplined approach helps to lock in gains, manage risk, and maintain exposure to future growth. It also provides an opportunity to review positions in commodities, FX, and alternatives, ensuring a balanced mix that reflects current market conditions and personal risk tolerance.
Regular rebalancing is a core part of institutions’ professional portfolio management—and an activity self-directed investors can try to copy, especially in volatile environments, to help avoid emotional decision-making and stay focused on long-term goals.
Build a phase-in plan and stick to it. Historically, investors with excess cash would have benefited from putting it to work in a balanced portfolio, even when stocks are in the middle of a drawdown.
Cash and short-term bonds that are not needed to fund spending in the next 3-5 years may be better put to work in markets, either all at once or using a phase-in strategy.
To improve the effectiveness of a phase-in strategy, we believe investors should only phase in the equity allocation of a portfolio and instead buy their bond and alternative investment allocations straight away, as there is a lower risk of bad timing. Having a phase-in plan, within a period of 12 months, can provide discipline if volatility increases. That said, investors can consider speeding up their phase-in after a 5% or 10% market sell-off, using all or most of the remaining excess cash.
As ever, a phase-in strategy should accord with a wider financial plan that is tailored to individual investors’ personal goals and risk tolerances.
Use structured strategies to earn yield and buy stocks “on sale.” Strategies such as structured investments can help investors to benefit from a rising market during the phase-in process, reducing the opportunity cost of phasing into the market.
In particular, we believe investors can look at reverse convertibles, a type of structured investment that combines a bond with a put option, linked to an underlying asset like a stock, index, currency pair, or commodity. These investments have the potential to offer higher yields compared to the market, which can be appealing to investors looking for above-average returns.
Investors can consider them as a more defensive way to buy an asset, especially if they expect the asset to deliver moderate returns in the near term. The coupon payments from this type of structured strategy can provide returns or a buffer against price corrections.
Investors looking to buy a particular asset but at a lower level than the current market price may also see merit in this approach, if the structure is settled with the physical asset.
Investing in reverse convertibles comes with risks, including the possibility of losing part of the invested capital if the underlying asset's price falls significantly. There's also the risk of the issuer defaulting, limited liquidity, and price transparency issues.
