Investors have shifted interest away from technology and large-cap stocks toward sectors that have been “catching up” and benefiting from investments driven by artificial intelligence.
Stocks broke a two-week losing streak on Friday, but technology stocks (XLK) and consumer discretionary stocks (XLY) and financials (XLF) remain negative so far this year.
“Money is flowing out of this behemoth. Money is flowing out of the tech space,” Keith Lerner, chief investment officer and chief market strategist at Truist, told Yahoo Finance.
Lerner pointed to the rotation of the Big Seven, including Microsoft (MSFT), e-commerce and cloud computing leader Amazon (AMZN) and electric car maker Tesla (TSLA).
Meanwhile, sectors that underperformed last year have surged.
Energy stocks (XLE) are up 22% since the beginning of the year. Rising oil prices and continued demand for oil sent shares of Chevron (CVX) and Exxon Mobil (XOM) up 20% and 22%, respectively.
Materials stocks (XLB) and industrial stocks (XLI) also rose 15% and 14% as artificial intelligence infrastructure construction and reshoring accelerated.
Meanwhile, investors have turned to defensive parts of the market, such as consumer staples (XLP), which saw consumer giant Walmart (WMT) hit an all-time high earlier this month.
While portfolio rebalancing, in which investors move from overvalued sectors to more stable areas, typically occurs at the beginning of the year, this year’s rotation has been amplified by volatility.
Parts of the tech industry are starting to sell off amid concerns that artificial intelligence could replace tasks traditionally handled by enterprise software companies.
The Technology Software Sector ETF (IGV) is down 23% year to date.
“AI panic trading” has now spread from the software field to wealth management and logistics.
On Friday, the cybersecurity company became the latest company to be hit after Anthropic announced a new security tool. CrowdStrike (CRWD) fell 5%, while Zscaler (ZS) and Cloudflare (NET) also fell 4% and 6%, respectively.
“Everyone is looking at it industry by industry, industry by industry, trying to figure out where the disruption from AI will go beyond the technology itself,” Lerner said.
Rising profits and easing interest rates from the Federal Reserve should help stocks continue to expand. Polymarket sources predict two to three interest rate cuts in 2026. (Disclosure: Yahoo Finance partners with Polymarket.)
UBS strategists said on Thursday that “the U.S. economy is showing resilience as the easing cycle remains intact… We expect healthy and expanding profits across sectors.”
