Key Takeaways
- US stocks sit just off all-time highs and are broadly flat year-to-date. Within the market, however, we have witnessed a notable rotation.
- Large cap tech names have sold off and value has outperformed growth. Small caps have generated much improved returns.
- What’s driven the moves? Investors are increasingly concerned around returns generated by AI-related capital expenditure (capex).
- Tech capex is set to be in the region of $660 billion over the next 12 months –much more than expected.
- Clarity around AI winners and losers will take time to emerge. In the meantime, investors are beginning to look more broadly for opportunities.
- We recently trimmed our US allocations towards neutral (from overweight) and are selectively tilting exposures towards small caps.
This week we focus on US equities and a rotation in the market. The S&P 500 is only about 2% off its all-time highs and US equities are pretty much flat year-to-date. Within the market, however, the ‘Magnificent 7’ tech names that have enjoyed strong performance over recent years are down around 7%. From a style perspective we have seen a rotation in the market, with ‘value’ outperforming ‘growth’ and much better performance from small caps.
So, is this a great rotation? There is plenty going on in the US market. The earnings season has been strong, but investors are becoming increasingly cautious around the AI investment commitments of many of the technology companies. For example, Alphabet, Amazon, Meta and Microsoft are set to spend a combined $660 billion over the next 12 months. This number is far more than expected and raises questions around the likely returns on these massive outlays.
Previously, such significant capital expenditure was welcomed, but investors are increasingly viewing it with some scepticism. More broadly we are seeing markets pricing in AI-related disruption across various industries and over the past few weeks we have seen more than a trillion dollars wiped off stock market values.
In terms of the perceived disruption to business models, we have seen various sectors impacted. These include software, legal services, IT consulting, wealth management, logistics and real estate. Over time we will gain greater clarity into the reality of this disruption, but for now it seems like some areas are being overly impacted in the selloff.
In 2025, every firm related to AI was viewed as a ‘winner’. Thus far in 2026 we are witnessing significant differentiation between the expected winners and losers. In the technology space, for example, we have seen hardware businesses outperforming software companies. Across the other aforementioned industries there are plenty of headlines around disruption but limited evidence of what that means in reality.
It is too soon to say how far this rotation will go, but we are witnessing swings in sentiment in terms of how AI will evolve. We are at an early stage of AI adoption, and we stand at the start of a long-term trend. Over time clarity will emerge, but investors are currently being a little more circumspect with regards to big tech names. A positive aspect of tech’s recent struggles is that those sectors that have been flying under the radar are getting more attention. We have seen small caps, value stocks and other regions enjoying better performance – with Japan, Asia and Latin America among those who are benefiting.
What does this mean for our views and positions? We recently trimmed our US allocation down to neutral following an extended period of being overweight. We do, however, still see plentiful opportunities in the US, particularly down the cap scale. The US economy remains in decent shape with solid economic growth and fiscal stimulus set to give additional support in the coming months. In addition, there is the potential for looser monetary policy from the Federal Reserve. The real winners and losers of the AI theme will take time to fully emerge, and as this plays out we may see more investors looking at broader opportunities – perhaps through a more global lens and with greater consideration for value stocks and small caps.
