The bounce in technology mega-cap stocks after the surprise ceasefire extension on Iran strikes by Trump means that ETFs are once again coming into favor, especially those targeting the AI and innovation sectors, such as the Gabelli Growth Innovators ETF (NYSE:GGRW), Roundhill Magnificent Seven ETF (BATS:MAGS), and Vanguard Mega Cap Growth ETF (NYSE:MGK). All the three funds are up in tandem with the tech stocks, between 2.5% and 3%, on Wednesday.

The "Magnificent Seven" rose by 2%-5% in on Wednesday due to reduced geo-political tension, resulting in a risk-on mood, reversing weeks of weakness that had turned the group into a drag on index performance.

Macro Whiplash Fuels ETF Money Moves

According to John Belton, portfolio manager at Gabelli Funds, and fund manager of GGRW, these sharp swings can be attributed to a market where macro factors dominate over fundamentals.

"The stock market continues to be very macro-driven as the Middle East conflict unfolds," Belton said, calling it "a tough stock pickers market" as "risk management dynamics dominate company fundamentals."

That backdrop has direct implications for ETFs. Funds with heavy exposure to mega-cap tech, such as MAGS, which holds only the seven largest AI-driven companies, or MGK, where these names account for a significant portion of assets, tend to move sharply with shifts in sentiment.

Belton noted that markets are "clearly eyeing an off ramp," warning that prolonged energy disruptions could push "recession odds… in a nonlinear way," even as earnings expectations remain intact for now.

Valuation Reset Boosts Growth ETF Appeal

The recent selloff has also reset valuations, creating a more favorable entry point for growth-oriented ETFs.

"Most of the Mag Seven [are] barely trading at a premium to the market now on a forward P/E basis, despite the fact that fundamentals for these companies remain very strong," Belton said. "Risk/reward for these stocks looks favorable at current levels."

That dynamic is particularly relevant for ETFs like GGRW and MGK, which blend exposure to mega-cap leaders with broader growth names, as well as more targeted AI funds like Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ) (up more than 3% today) that diversify across the AI value chain.

Belton also highlighted tech resilience within the tech industry. "Software… has been acting more defensively in recent weeks with valuations at historic lows," he said, adding that "most large tech companies should not face material first order impacts from the crisis."

AI Trade Still The Core Catalyst

Beyond the macro noise, the long-term AI narrative that is central to many growth ETFs, remains intact.

"That is a very encouraging data point," Belton said, pointing to rapid revenue growth at companies like Anthropic. More broadly, he described the expansion in AI revenues as "unprecedented and extraordinary growth—and clear evidence of strong returns on AI capex."

Looking ahead, Belton expects further upside as innovation cycles accelerate. "The next few months will feature releases of the first LLMs trained on NVDA's Blackwell infrastructure… [with] step function improvements in capabilities," he said.

For ETF investors, the recent volatility may have been more about macro fear than a breakdown in the growth story. "The market is just waiting for visibility," Belton said. "Once normal market dynamics resume… there's a lot of upside for many of these stocks."

Image: Shutterstock