U.S. equity fund demand cooled in the week through February 4, reflecting a growing sense of caution as volatility in technology stocks unsettled investors. Net inflows into U.S. equity funds fell to $5.58 billion, nearly half the $10.82 billion recorded the prior week, according to data from LSEG Lipper. The slowdown highlights how quickly sentiment can shift when crowded trades come under pressure, even as pockets of earnings strength continue to offer selective support.

Tech Weakness Drives a Shift in Equity Flows

The pullback was closely tied to renewed stress in software shares after Anthropic introduced a legal-focused plug-in for its generative AI chatbot. The move revived fears of rapid disruption across parts of the software industry, accelerating a reassessment of valuations that many investors already viewed as stretched.

That caution was evident in fund flows. Technology sector funds saw $2.34 billion in net outflows, making them the weakest-performing category during the period. In contrast, investors directed $2.11 billion into industrial funds and $1.44 billion into metals and mining, signaling a rotation toward areas perceived as more closely tied to real-economy demand and inflation hedging.

Large Caps Hold, Smaller Names Struggle

Within equities, the divergence between market segments widened. U.S. large-cap funds attracted $1.1 billion in inflows, suggesting that investors remain comfortable holding dominant franchises with strong balance sheets. Mid-cap and small-cap funds, however, experienced net outflows of $1.59 billion and $1.67 billion, respectively.

This pattern reflects a familiar risk-management instinct. In uncertain environments, investors tend to consolidate exposure in liquid, widely followed names while trimming positions in smaller companies that are more sensitive to economic slowdowns and financing conditions.

Bonds and Cash Signal Defensive Positioning

The most telling signal came outside equities. U.S. bond funds recorded a fifth consecutive week of inflows, drawing $11.11 billion. Short-to-intermediate investment-grade funds alone attracted $6.34 billion, the largest weekly inflow for that segment since at least 2022. Municipal bond funds and inflation-protected funds also posted solid gains, reinforcing the impression that investors are prioritizing income and capital preservation.

Meanwhile, U.S. money market funds absorbed a striking $83.09 billion in net inflows, the largest weekly intake since early December. Such moves typically reflect a desire to stay liquid and flexible, allowing investors to redeploy capital once volatility subsides or valuations become more compelling.

Earnings Strength vs. Valuation Anxiety

Not all signals were negative. Strong earnings from companies such as Eli Lilly and Super Micro Computer helped cushion broader equity sentiment, reminding markets that fundamentals in select areas remain robust. Still, the flow data suggest that positive earnings surprises are no longer enough to offset broader concerns about technology disruption, AI spending discipline, and stretched multiples.

What to Watch Going Forward

Looking ahead, fund flows will serve as a real-time barometer of whether this caution hardens into a sustained de-risking cycle. If technology stabilizes and earnings momentum holds, equity inflows could rebound. If volatility persists, however, the continued preference for bonds and cash may signal that investors are bracing for a longer period of adjustment rather than a brief pause.