"Money's moving out of tech": A practical playbook for 2026's AI scare trade
Stocks just ended a two-week slide, but the rotation is clear: capital is leaving megacap tech and chasing sectors with catch-up potential. Year to date, Tech (XLK), Consumer Discretionary (XLY), and Financials (XLF) are still negative.
Investors are pricing in AI disruption where it hurts near-term profits and rewarding businesses tied to physical buildouts, cash flow, and pricing power. The result: widening market breadth, more dispersion, and a higher bar for software valuations.
What's working now
- Energy (XLE): +22% YTD. Higher oil and steady demand lifted Chevron (CVX) ~20% and ExxonMobil (XOM) ~22%.
- Materials (XLB): +15% YTD. Benefiting from AI infrastructure and reshoring demand.
- Industrials (XLI): +14% YTD. Suppliers to data centers, grid upgrades, and logistics are in favor.
- Consumer Staples (XLP): Defensive rotation. Walmart (WMT) hit an all-time high earlier this month.
What's lagging
- Megacap Tech: Rotation out of the "Magnificent Seven" names, including Microsoft (MSFT), Amazon (AMZN), and Tesla (TSLA).
- Software: The Tech-Software ETF (IGV) is down ~23% YTD as investors reassess AI's impact on traditional software models.
- Cybersecurity: AI announcements sparked selling: CrowdStrike (CRWD) -5%, Zscaler (ZS) -4%, Cloudflare (NET) -6% on Friday.
Why the rotation is sticking
The market is hunting for earnings durability and tangible cash flows while AI re-rates software risk. Capital is flowing to inputs and infrastructure: energy, grids, chips, data centers, and the suppliers behind them.
Volatility is amplifying the shift that usually happens in January rebalances. Lower rates and steady profit growth could keep broadening intact if execution holds.
Rates backdrop and breadth
Polymarket participants are pricing in two to three Fed cuts in 2026. UBS expects profits to broaden and sees the S&P 500 potentially reaching 7,700 by year-end, with opportunities across financials, health care, utilities, consumer discretionary, and industrials.
Watch the policy path. The easing cycle, if confirmed, supports cyclicals and carry, but it won't rescue weak unit economics. Track the data and forward guidance, not headlines.
Federal Reserve monetary policy
Portfolio actions for finance pros
- Right-size mega-cap tech exposure: If concentration risk built up in 2023-2025, rebalance toward names with pricing power, cash yield, and real assets.
- Lean into AI infrastructure beneficiaries: Energy producers and services, grid/electrification plays, industrial automation, key materials suppliers. Focus on free cash flow and disciplined capex.
- Barbell defense with offense: Pair cyclicals with staples, utilities, and select health care to smooth drawdowns while keeping upside tied to capex cycles.
- Be selective in software: Underwrite by use-case resilience, switching costs, and AI moat. Favor vendors embedded in workflows with clear ROI and secure data privileges.
- Cybersecurity lens: Expect faster product cycles and pricing pressure as AI-native tools emerge. Prioritize platforms proving net retention, managed service leverage, and device-to-cloud coverage.
- Use earnings revisions as your North Star: Follow 3- and 6-month EPS revision breadth to confirm leadership. Fade narratives not backed by guidance and backlog quality.
- Hedge the tails: Skewed put spreads or collars around event risk. Keep duration and credit beta sized to your rate path and liquidity needs.
- Track real-economy signals: Rig counts, power demand tied to data centers, utility capex, freight indices, and PMI new orders vs. inventories.
- Scenario the rates path: Cuts help multiples and carry, but a stickier inflation print pushes you back to cash generators and short-duration plays.
Key catalysts to watch
- FOMC communications and inflation prints that confirm or challenge the easing path.
- Hyperscaler and semiconductor capex updates tied to data center demand and power constraints.
- Oil supply/demand signals and policy headlines that affect upstream and services activity.
- AI product releases in software and cybersecurity that could reset expectations again.
Bottom line
AI is a growth tailwind, but its first-order winners aren't just software. For now, the market is paying for inputs, infrastructure, and defensives while it re-prices digital incumbents.
Stay nimble. Let revisions and cash flow decide your weights, not hype.
This content is for informational purposes and is not investment advice.
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