US stocks trigger a "big rotation of funds": AI concept fluctuations cause anxiety, "non-technology" sectors are favored

The technology sector, once an unstoppable force in the US stock market, has now become a bumpy journey, forcing investors to seek calmer areas and invest in more stable traditional economic companies. This means that funds are being shifted from the artificial intelligence industry (where it's increasingly difficult to distinguish winners from losers) to sectors such as materials and energy producers or consumer goods manufacturers. Since late October, some non-tech stocks have also driven gains in their respective industries, including Southwest Airlines Co. (LUV.US) (up 72%), lithium producer Albemarle Corporation (ALB.US) (up 71%), Moderna (MRNA.US) (up 65%), and logistics giant Robinson Logistics (CHRW.US) (up 56%). JC O'Hara, chief technical strategist at Roth Investment, said in a phone call that based on the trend of the S&P 500 Index's 20-day moving average, excluding tech stocks, the index is expected to rise 6% by May. He said he's not bearish on the tech sector but rather "appreciates" sectors that are driving overall gains. O'Hara said, "The tech industry is so large that if you slightly reduce the size of the tech industry and invest the saved funds into smaller market sectors, these sectors will experience explosive growth." Wall Street has generally agreed with this view this year, but last week's tech stock sell-off spread to all sectors of the market, casting doubt on this view. However, computer and software companies drove a rebound on Friday and outperformed the market again on Monday. It's this volatility that prompted strategists to suggest investors look for alternative investments. After three years of strong performance by tech stocks, the market allocation has become heavily skewed towards this sector, leading to potential improvements for non-tech industries. Savita Subramanian, head of US equities and quantitative strategy at Bank of America Corp., said in a report on Monday that "the broadening of the investment scope is just beginning." According to the bank, the average holding of S&P 500 index component stocks, excluding the seven tech giants, is 20% lower than its weight in the index, with only an "insignificant" 10% of funds holding these stocks. Subramanian said, "For years, the leadership position of large-cap stocks has driven active managers into mega-cap stocks while ordinary stocks have been overlooked. In contrast, the ownership ratio of the seven tech giants is as high as 90%, with the weight of these stocks being heavily overexposed except for Tesla, Inc. and Apple Inc." She stated that as funds rotate to other market sectors, selling the mega-cap tech stocks will make these stocks "particularly vulnerable." Profit expectations confirm the view that the leadership position will expand. Data from Morgan Stanley shows that the median earnings of Russell 3000 index component stocks are expected to grow by 11% this year, the strongest growth in four years. This trend has continued since November last year. Since October 28th, the S&P 500 information technology sector has fallen by 6.7%, while the energy sector has risen by 23%, the materials sector by 17%, and the consumer essentials and industrial sectors by 12%. In broader terms, the S&P 500 index has risen by 1.1% since tech stocks peaked. O'Hara said, "The current trend is not about selling tech stocks but answering the question of 'how to diversify portfolios with overweighted tech stocks?' The answer is to return to traditional economic stocks." He said that shifting from a few tech stocks to more diverse industrial stocks and other industries helped the Dow Jones Industrial Average break through the 50,000 point mark. Concerns continue over the tech industry struggling, as the stock price drops of major tech companies like Amazon.com, Inc., Microsoft Corporation, Alphabet, and Meta Platforms weigh down on the Nasdaq 100 index and funds tracking its performance, such as the Invesco QQQ ETF. Jeffrey Jacobson, derivatives strategy director at 22V Research LLC, said in a report on Monday, "I fully expect the QQQ ETF to continue to underperform in other market sectors (small-cap stocks, equal-weight stocks, value stocks), as we see funds continuing to exit these still 'crowded' stocks after years of excess returns." Jacobson said that both Alphabet and Microsoft Corporation have announced "aggressive" capital expenditure plans, leading to stock price pressure, and the equal-weighted investment portfolios of these four tech giants have just fallen below the low point of November. He recommended investors buy put option spread combinations in the QQQ ETF as a hedge against market sector risks, "especially after the 2% rebound in stock prices last Friday." Strategists still encourage holding tech stocksjust not as much as in the first half of 2025. OHara said, "I think you don't need to increase holdings anymore. While having tech products is still good, you will also see other areas in the market benefiting from this strong industrial revival."