Investors are increasingly retreating from technology and mega-cap stocks, opting instead for sectors benefiting from a resurgence fueled by artificial intelligence (AI) investments. Stocks managed to break a two-week losing streak on Friday, yet year-to-date performance remains lackluster for sectors like Technology (XLK), Consumer Discretionary (XLY), and Financials (XLF), all of which are still in the red.
According to Keith Lerner, chief investment officer and chief market strategist at Truist, “Money’s coming out of this big behemoth. Money’s moving out of tech.” This shift has been particularly evident in the rotation away from the so-called Magnificent Seven tech giants, including Microsoft (MSFT), Amazon (AMZN), and Tesla (TSLA).
In contrast, sectors that struggled last year are witnessing substantial gains. Energy stocks (XLE) have surged by 22% since the beginning of 2023, largely driven by rising oil prices and persistent demand. Major players like Chemical (CVX) and ExxonMobil (XOM) have seen their shares increase by 20% and 22%, respectively. Similarly, the Materials (XLB) and Industrial stocks (XLI) have posted gains of 15% and 14%, respectively, as AI infrastructure investments and reshoring initiatives gain momentum.
Investors are also gravitating toward more stable segments of the market, such as Consumer Staples (XLP). Notably, retail giant Walmart (WMT) reached an all-time high earlier this month. Although portfolio rebalancing is typically seen at the start of the year, this year’s rotation has been intensified by market volatility.
A sell-off in certain areas of the tech sector began last month, spurred by concerns that AI may disrupt roles traditionally occupied by enterprise software companies. The Tech-Software Sector ETF (IGV) is down 23% year to date, reflecting this sentiment. The so-called “AI scare trade” has expanded beyond software to include wealth management and logistics sectors.
Cybersecurity firms recently faced declines, with shares of CrowdStrike (CRWD) dropping 5% and Zscaler (ZS) and Cloudflare (NET) falling by 4% and 6%, respectively, after Anthropic introduced a new security tool. Lerner noted, “Everyone’s kind of going through each one, sector by sector, industry by industry, trying to figure out where the AI disruption is going to be beyond just within tech itself.”
Looking ahead, profit growth and anticipated easing of interest rates by the Federal Reserve are expected to support a broadening of the stock market. Betters on Polymarket are predicting two to three rate cuts in 2026. UBS strategists expressed optimism, stating, “With the easing cycle still intact, and the US economy showing resilience … we expect healthy and broadening profit growth across sectors.”
This evolving market landscape underscores a significant shift in investor preferences, illustrating how sectors once deemed underperforming can gain traction amid changing economic conditions and technological advancements. As AI continues to influence various industries, the dynamics of investment will likely evolve, presenting both challenges and opportunities for investors in the months ahead.
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