2 months ago
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Big technology companies that rode the artificial intelligence wave to huge gains are watching investors pull their money out and put it somewhere else. This could be a turning point after three years where these stocks ran the show.
American stocks went up 78% while everyone was betting on AI companies. However, there are growing questions about whether these technologies can truly transform the economy and produce the enormous profits that proponents have claimed.
Ed Yardeni runs Yardeni Research as president and chief investment strategist. He’s got a name for what’s happening. “I call it ‘AI fatigue,'” he said. “I’m tired of it and I suspect a lot of other people are sort of wary of the whole issue.”
Market rotation picks up steam
If the trend continues, it could end an unusual period when a few stocks drove the market. Since ChatGPT’s launch in 2022, Nvidia, Microsoft, and Apple added trillions in value, with Alphabet, Meta, Broadcom, and Oracle also benefiting from the AI boom.
The shift started after the S&P 500 topped out in late October, then dropped in November. It’s been gradual. Bloomberg tracks the Magnificent Seven as a group, and those stocks are down 2% since October 29 through Monday’s close. The other 493 companies in the S&P 500 went up 1.8% in that same time.
Money’s been flowing out of the hot momentum stocks into sectors that are more defensive and don’t cost as much.
There’s this fund called the Defiance Large Cap Ex-Magnificent Seven ETF that launched at the end of 2024. It pulled in fresh money for six months straight to close out the year. December’s inflows were actually four times what came in during November. The fund trades as XMAG and returned 15% last year. Most of that happened in the last six months.
Yardeni said the S&P 493’s performance in 2025 was “impressive.” Profit margins for this group stayed high and avoided pressure despite political changes, new tariffs under President Trump, and signs of a weakening job market.
If the economy gets better, cyclical sectors and growth-oriented ones will benefit. That creates opportunities for investors who want to move past Big Tech’s dominance. Banks like JPMorgan Chase & Co. and Bank of America Corp. should gain. Consumer companies would benefit when shoppers feel confident enough to buy Nike Inc. sneakers or book vacations using Booking Holdings Inc.
History suggests bumpy road ahead
There are risks though. History shows that when a small group of dominant stocks loses control, the market usually gets bumpy.
Doug Peta, chief US investment strategist at BCA Research, said, “The most benign outcome for the bull market would be a peaceful transfer of power to a broad coalition of the other 493 S&P 500 constituents.” But then he added, “That’s not how potent and highly concentrated bull markets typically evolve, however.”
Peta still thinks AI has more room to run despite concerns that companies are spending too much on it and valuations have gotten stretched. But AI investors are being pickier now. It used to be that any company connected to AI went up. That’s splintered. Former darlings like Oracle have taken steep losses.
“It is not my view that the end of the Magnificent Seven’s reign is at hand – I will be surprised if they don’t make a final surge higher to cap their run – but once it does arrive, it’s most likely that new leadership will not emerge until US equities suffer a meaningful bear market,” Peta said.
Yardeni is more negative on AI stocks. He thinks the fatigue started with a cryptic warning from Michael Burry in late October. Burry’s the money manager who got famous. He followed up by revealing he’d made bearish bets on Nvidia and Palantir Technologies Inc.
Some warn Big Tech’s rally is slowing. Goldman Sachs expects the Magnificent Seven to drive 46% of S&P 500 earnings growth in 2026, down from 50% in 2025, as the rest of the index gains momentum.
The S&P 493 looks attractive to value investors too. Goldman Sachs strategists led by Ben Snider see wide gaps between valuations and fundamentals. Combined with a decent economic outlook, that’s good for value stocks.
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