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Amid a tech-driven stock market surge, major U.S. investment funds are being compelled to sell shares to comply with tax regulations. This move is necessary to prevent breaching rules that mandate diversified portfolios.

What Happened: Investment giants like Fidelity and T Rowe Price are selling shares to avoid violating U.S. tax laws. The recent rally in tech stocks has pushed these funds close to exceeding limits set by the Internal Revenue Service (IRS). The IRS requires “regulated investment companies,” including mutual funds and ETFs, to keep large holdings under 50% of their portfolios, the Financial Times reported on Friday.

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This rule, which traditionally affected specialized funds, now impacts even slightly overweight positions due to gains in major U.S. tech stocks. The surge has led to a concentration in the S&P 500, with tech giants like Nvidia Corp. (NASDAQ:NVDA), Apple Inc. (NASDAQ:AAPL), Meta Platforms Inc. (NASDAQ:META), Microsoft Corp. (NASDAQ:MSFT), and Amazon.com Inc. (NASDAQ:AMZN) accounting for nearly 46% of this year’s gains. Active fund managers face challenges in outperforming these indices.

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Funds such as Fidelity’s Blue Chip Growth (NASDAQ:FBGRX) and BlackRock’s Long-Term US Equity ETF (NASDAQ:BELT) have surpassed the 50% threshold. Although no penalties have been enforced yet, funds must rebalance their portfolios to adhere to IRS rules. The IRS has not commented on individual cases.

Why It Matters: The tech sector’s recent rally, highlighted by Tesla Inc.’s (NASDAQ:TSLA) impressive performance, underscores the volatility and influence of tech stocks on the market. Tesla Inc. experienced an 18% surge following robust quarterly results, marking its best session since March 2021. Despite this, market sentiment remains cautious.

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