Investors are finally doing something they have not done in a while: selling last year’s winners and buying almost everything else.
After the Fed’s latest rate cut, money is flowing out of pricey, AI-linked growth stocks and into value names, small caps, financials, industrials, and even gold. On the surface, that looks like trouble for tech. Under the hood, it is a sign investors are growing more confident about the economy.
The AI Trade Takes a Breather
After carrying the market for years, AI-heavy growth stocks hit a speed bump this week. The S&P 500’s tech sector logged its biggest drop since October, while the Nasdaq lagged badly.
This was not panic selling. It was profit-taking.
Investors have been sitting on massive gains in AI names, many of which trade at lofty multiples. The Fed’s rate cut gave them a reason to rotate into cheaper parts of the market that benefit more directly from lower borrowing costs.
As one strategist put it, this is money moving out of the names that have done well and into the names that have been left behind.
Value, Small Caps, and the Dow Step Up
The clearest signal of rotation showed up in the Dow, which just logged its biggest three-day outperformance versus the Nasdaq and S&P 500 since January.
Small caps, financials, and industrials also caught a bid, reflecting a shift toward more cyclical exposure. Even gold joined the party, hitting record highs as rate cuts boosted demand for real assets.
One key tell: the ratio between growth and value stocks dropped to its lowest level since early September, confirming investors are dialing back their appetite for expensive growth.
Why This Is a Healthy Market Move
Despite the selling, most strategists are not calling this the end of the AI trade. Instead, they see it as a necessary reset.
Tech still benefits from long-term tailwinds like AI-driven productivity and earnings growth. But a market where only a handful of mega-cap tech stocks are doing all the work is fragile.
A rotation into value, small caps, and cyclicals suggests investors believe in a Goldilocks setup: steady growth, cooling inflation, and lower rates. In that environment, more sectors can participate.
The takeaway: when leadership broadens, markets tend to get stronger, not weaker. AI stepping back so everything else can step up might be exactly what this rally needed.