US stocks see largest fund outflows in 3 months, while Japanese stocks welcome largest fund inflows in 7 weeks.

The U.S. stock market is experiencing the most significant capital outflow this year, while funds are shifting to certain international markets.

On July 3, according to Bloomberg, Bank of America cited EPFR Global data showing that for the week ending July 1, U.S. equity funds saw $17.2 billion in outflows, the largest weekly outflow in more than three months. Meanwhile, Japanese equities attracted $1.9 billion in inflows, a seven-week record for weekly inflows, making them one of the main beneficiaries of the reallocation.

One background factor for this large-scale capital exodus is the growing market skepticism over the high valuations of AI-related stocks. The Philadelphia Semiconductor Index has fallen 11% cumulatively over the past two trading days, dealing a heavy blow to chip stocks. JPMorgan strategists also warned that the extreme outperformance of U.S. semiconductor stocks relative to AI hyperscale cloud companies has created an unsustainable valuation gap, which they expect will eventually narrow.

U.S. equity outflows accelerate, reversing the strong momentum from the start of the year

U.S. equity funds started the year strong in terms of inflows, but this trend is reversing. Last week, U.S. equity funds recorded their first net redemptions in three months, and this week's $17.2 billion outflow expanded on that trend, marking a clear shift in investor sentiment.

The strategist team led by Michael Hartnett at Bank of America reported the above data, noting that overall equity markets saw a total of $13.9 billion in outflows for the week.

Skepticism over high AI valuations is a key driver of the pressure on U.S. stocks this time. The Philadelphia Semiconductor Index has fallen 11% cumulatively over the past two trading days, indicating significant selling pressure on the chip sector.

JPMorgan strategists pointed out that the extreme outperformance of U.S. semiconductor stocks relative to AI hyperscale cloud companies has created an unsustainable valuation gap, and they expect this gap will eventually revert. This assessment has further fueled concerns about the reasonableness of tech sector valuations.

As U.S. stocks face capital outflows, some international markets have become destinations for funds. Japanese equities attracted $1.9 billion in inflows for the week, the largest weekly inflow in seven weeks, showing investors actively seeking allocation opportunities outside the U.S.

In contrast to the overall outflow from equity markets, the bond market attracted significant funds this week. Investment-grade bonds saw $17.2 billion in inflows for the week, while high-yield bond funds recorded $3.4 billion in inflows, the largest weekly inflow in over a year, indicating that some investors are shifting to fixed-income assets for defensive positioning while avoiding equity risks.

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