Investors have shifted their appetite from tech and megacaps into sectors that have been playing “catch-up” and benefiting from AI-fueled investments.
Stocks broke a two-week losing streak on Friday, but year to date, Tech (XLK) and Consumer Discretionary (XLY), along with Financials (XLF), remain negative.
“Money’s coming out of this big behemoth. Money’s moving out of tech,” Truist chief investment officer and chief market strategist Keith Lerner told Yahoo Finance.
Lerner noted the rotation away from Magnificent Seven giants like Microsoft (MSFT), e-commerce and cloud leader Amazon (AMZN), and EV maker Tesla (TSLA).
Meanwhile, sectors that underperformed last year have been making big gains.
Energy stocks (XLE) are up 22% since the start of the year. Rising oil prices and continued demand for oil have sent shares of Chevron (CVX) and ExxonMobil (XOM) up 20% and 22%, respectively.
Materials (XLB) and Industrial stocks (XLI) are also up 15% and 14% as AI infrastructure buildouts and reshoring accelerate.
Meanwhile, investors have turned to defensive areas of the market like Consumer Staples (XLP), with consumer giant Walmart (WMT) hitting an all-time high earlier this month.
Although portfolio rebalancing — where investors shift from overvalued sectors into more stable areas — typically happens at the start of the year, this year’s rotation has been amplified by volatility.
A sell-off in pockets of the tech sector began last month amid fears that artificial intelligence could take over tasks traditionally handled by enterprise software companies.
The Tech-Software Sector ETF (IGV) is down 23% year to date.
The “AI scare trade” has now spread from software to wealth management and logistics.
Cybersecurity firms were the latest to get hit on Friday after Anthropic announced a new security tool. Shares of CrowdStrike (CRWD) dropped 5%, while Zscaler (ZS) and Cloudflare (NET) also fell 4% and 6%, respectively.
“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,” Lerner said.
Profit growth and the easing of interest rates by the Federal Reserve should help the stock market continue to broaden. Polymarket betters are predicting two to three rate cuts in 2026. (Disclosure: Yahoo Finance has a partnership with Polymarket.)
“With the easing cycle still intact, and the US economy showing resilience … we expect healthy and broadening profit growth across sectors,” UBS strategists said on Thursday.
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