Tech has been struggling of late. After carrying the indices for several years, the sector is now under pressure. That shift is showing up in index performance: the Nasdaq is stalling while the Dow Jones keeps rising. The benchmark for more traditional parts of the economy pushed through the 50,000-point mark late last week.
After going all-out on AI winners, the market has decided to refocus on the "losers". From software to financial services to video games, blowups have become commonplace during this earnings season.
As for AI's winners, the market is questioning their ability to generate returns from ever-expanding investment plans. The latest results from the hyperscalers were met cautiously, as all of them sharply raised their capex forecasts. Alphabet, Amazon, Meta and Microsoft plan to invest $660bn in 2026.
Only the semiconductor segment is holding its own. SK Hynix, Samsung, TSMC, and ASML are all sharply higher since the start of the year. No one really knows where the AI revolution will end up, but it is clearly benefiting the suppliers of picks and shovels.
For several months now, doubts about AI have been emerging and are translating into a shift in leadership within the US market. The Nasdaq 100 last hit a record high on October 29, during the previous earnings season. However, tech has not pulled the whole market in its wake. Instead, what we are seeing is a kind of rotation.
Performance of different S&P 500 sectors since October 29
Indeed, over the past 3 years, investors have piled into tech to play AI and have neglected other parts of the market. That enthusiasm has created wide valuation gaps, which today may justify a form of rotation.
The Dow Jones is up 4% since the start of the year, while the Nasdaq is down an inch or two (-0.2%). However, note that over the past ten years, the Dow Jones has outperformed the Nasdaq only twice: in 2016 and in 2022.
