MW Avoiding this one sector has been the key to gains for stock investors so far in 2025

By Barbara Kollmeyer

Invest anywhere but big technology, says Societe Generale

The nearly 5% drop for the Nasdaq Composite COMP so far this year could be the start of an unwinding in what has been a profitable sector play for investors over the past two years, although 2025 is still young.

But the key to generating returns for early 2025 has been to avoid those major technology stocks and the Nasdaq-100, according to Societe Generale strategists led by Manish Kabra, who heads up U.S. equity strategy for the firm. The chart below lays out just how painful the year has been for tech stocks.

Nearly all equal-weight S&P 500 SPX sectors, barring tech, are positive for the year, Kabra and his team told clients in a recent note.

The 493 stocks in the index that aren't among the big technology names known as the Magnificent Seven - Alphabet $(GOOGL)$, Microsoft $(MSFT)$, Nvidia $(NVDA)$, Meta $(META)$, Tesla $(TSLA)$, Apple $(AAPL)$ and Amazon.com $(AMZN)$ - saw a 3.2% return for January to February, while those seven stocks were down 5.8%.

Read: Nvidia's stock sinks, wiping out six months of gains as the AI trade unravels

Kabra said the Societe Generale strategists now favor domestic exposure, financials and industrials, and he flagged a few key trades they are focused on: the S&P 500 Equal Weight Index XX:SP500EW, U.S. infrastructure and local supply chains, U.S. reshoring and U.S. domestic supply chains.

Several exchange-traded funds make bets on those groups of stocks, such as the iShares U.S. Infrastructure ETF IFRA, the iShares MSCI USA Equal Weighted ETF EUSA and the Tema American Reshoring ETF RSHO.

The team also likes small-cap stocks from the Russell 2000 RUT with a value bias, but focused on those quality names with a lower default risk. As the chart below shows, those smaller company picks have a high exposure to sectors the strategists prefer - financials and industrials.

Vanguard's U.S. Quality Factor ETF VFQY also seeks out those small-cap value names with low default risk.

Two more U.S. themes that Societe Generale is keen on are peak tech capital expenditure - "software over semis in early days of reversal" - and cybersecurity.

Kabra said their diversifier is European assets, which have gotten increasing attention this year: European banks on the view that regulations have reached a peak, and European stock indexes with high exposure to financials and the lowest sensitivity to U.S. equities. For the latter, they like bullish positions on Spain's IBEX 35 XX:IBEX and Italy's FTSE MIB IT:I945 indexes, both of which saw strong performances in February.

Those banking on peace in Europe would want to have a bullish position on assets such as the euro $(EURUSD.FOREX)$ and German midcap stocks XX:MDAX, Kabra and his team said. The latter has 35% revenue exposure to the domestic German economy, almost double the large-cap DAX DX:DAX.

"Sector-wise, industrials are the biggest part of the MDAX; and compared with the DAX, the MDAX has much higher weighting in real estate, industrial, chemicals and construction, which are all struggling with higher gas prices," the strategists said.

Read: U.S. stocks are being trounced by Europe as Trump retreats from Ukraine, focuses on 'America First'

-Barbara Kollmeyer

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March 04, 2025 10:17 ET (15:17 GMT)

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