The US stock market experiences a major rotation: AI tech stocks ebb, while financial and consumer sectors take the lead in gains.

The U.S. stock market exhibited significant divergence on Monday: the strongest-performing stocks this year faced heavy selling, while other sectors remained resilient, highlighting an increasing trend of sector rotation. According to Yahoo Finance, as of Monday's midday, the top 10% of S&P 500 stocks by year-to-date performance saw an average decline of about 1.6%, making it the worst-performing sector of the index for the day. The losses were particularly concentrated among the top-performing stocks19 out of the 20 best-performing stocks of 2023 were down, with an average drop of 2.7%. Taking SanDisk (SNDK.US) as an example, this stock has gained over 500% year to date, but on Monday it fell more than 7% in a single day. Micron Technology, Inc. (MU.US) and Western Digital Corporation (WDC.US) have both doubled in price this year, but both dropped over 5% on Monday. The softness in the chip sector is becoming evident. Last week, the iShares Semiconductor ETF (SOXX) faced a sharp sell-off after rebounding to a critical technical resistance level. In early trading on Monday, the ETF briefly hit a three-week low before finding buying support near the $500 level. Software stocks are also under pressure. On the other hand, another aspect of the market presented a starkly different picture. "This is a large-scale rotation," said Mark Newton, head of technical strategy at Fundstrat, on Monday. He pointed out that the leading forces in the market this year have shifted from energy to technology, and as various subsectors within technology have begun to pull back, sectors like finance, industrials, and healthcare have taken the stage. The trend of sector rotation is becoming more pronounced. On Monday, among the main sectors of the S&P 500, technology (XLK) was the worst performer, while consumer staples (XLP), financials (XLF), and communication services (XLC) all rose by 1%. The financial sector approached its all-time intraday high. This rotating trend has been ongoing for several months. Just as the chip sector entered a bear market, the healthcare sector began to break out upwards; and less than two weeks ago, some of the most high-risk trades in the market were leading the charge. Now, those former leaders are receding, but the sell-off has not overwhelmed the entire market. On Monday morning, despite a slight decline in the S&P 500 index, about 56% of its constituent stocks recorded gains. The U.S. stock market has been in a bull run for nearly four years, and the current situation is markedly different from previous widespread declines. "We know that sector rotation has provided considerable breadth to this market," Newton added. Institutional Insights: Consensus on Rotation, Divergence in Allocation Direction Regarding the current market rotation, mainstream Wall Street firms generally agree on its sustainability, but opinions differ on the direction of asset allocation. J.P. Morgan released a research report on Monday stating an optimistic outlook for the stock market for the remainder of the year, believing that the upward movement will stem from sector rotation rather than a broad-based rally. Strategist Fabio Bassi expects the market to rise gradually, with sector rotation as the main theme. In specific allocation directions, J.P. Morgan favors high-quality growth stocks and ultra-large cloud service providers, while also seeing the semiconductor sector as attractive after recent valuation recalibrations. Additionally, J.P. Morgan interprets the steepening U.S. Treasury yield curve as a reflection of increasing capital demand and investment opportunities, rather than concerns about policy missteps. Goldman Sachs Group, Inc. takes a more cautious stance. Senior trader Natasha Tiwana warns that the momentum structure surrounding the AI theme has undergone a fundamental shiftwithin the momentum factors, the semiconductor and AI composite sector have shifted from bullish to bearish, with the software sector now becoming the largest weight for short-term momentum. Goldman Sachs noted that the frequency of the momentum factor experiencing single-day declines of over 5% in 2026 has exceeded the total from the past five years, forcing the market to seek broader diversification beyond the AI narrative. In terms of allocation suggestions, Goldman Sachs recommends that investors turn their attention to European and Japanese bank stocks, gold mining companies, and copper mining stocks for hard asset exposure. However, Goldman Sachs also clearly stated that AI trading has not ended, but its composition, momentum characteristics, and margin of safety are being rewritten in real-time, advising to adopt a more tactical approach to AI beneficiaries, focusing on opportunities where price and earnings per share (EPS) show significant divergence. Looking ahead, the market is closely monitoring two key catalysts: NVIDIA Corporation (NVDA.US) is set to release its earnings report on August 26, which will test the validity of the AI narrative; Federal Reserve Chair Waller is scheduled to deliver his first keynote address at the Jackson Hole Economic Symposium on August 28, potentially providing fresh guidance on interest rate prospects. With these two significant events approaching, the trajectory of U.S. stocks is poised for a critical clarification.