Rotation, Not Reckoning: What’s Testing the AI Trade?
As the S&P 500 sits just below its recent all-time highs, and its equal-weighted counterpart hits a new record, it may seem like the stock market is enjoying some summer calm. But underneath the hood, the market is experiencing one of its most significant rotations in years. Some of the biggest sector winners from the first half of the year have underperformed in the last month, while under-loved sectors have outperformed as capital flows into the laggards and more cyclical stocks. Take chips: The Philadelphia Semiconductor Index has dropped nearly 24% since late June. Over the same period, healthcare and financials have posted gains of over about 9% and 5%, respectively.
Tech has dragged while the broader market has gained
What looks like a sell-off in technology is actually a repricing of AI economics. Investors still believe AI will reshape the economy, but they are no longer rewarding spending alone. In a world of higher real rates, the market is shifting from pricing potential to demanding proof of profitability. That’s fueling a rotation away from concentrated AI trades and toward other sectors, while leaving the broader bull market intact.
From spending to returns
While S&P 500 volatility remains toward the lower end of its historic range, volatility in tech has sharply spiked. With a sell-off driven by crowded positions, fundamental concerns over AI spending and a rising cost of capital, the magnitude of the downside move in technology stocks stands in stark contrast to the momentum-driven gains investors have become accustomed to.
A higher cost of capital
As investors digest skepticism in tech, potential change in the rates regime is also playing a role in the rotation. When rates rise, long-duration growth assets become more vulnerable. Technology falls into that category, as capital expenditures and earnings are modeled on a longer time horizon. In this macro backdrop, in which the tone of the Federal Reserve has changed, sensitivity to rates has therefore increased.
Semis are exhibiting sensitivity to long-end rates
What ultimately stabilizes the trade is proof that AI spending is translating into measurable business outcomes. There is already evidence of that as productivity-driven margin expansion across corporate America emerges. More and more companies have begun showing similar improvements, but the market is demanding broader confirmation.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “Rotation, Not Reckoning: What’s Testing the AI Trade?”, Kriti Gupta, Executive Director, Global Investment Strategist, Nick Roberts, Portfolio Manager, Specialized Strategies, July 31,2026
