Wall Street's "Great Rotation" Underway: AI Trading Fades, Tech Stocks Out of Favor, Capital Flows Shift to Defensive Sectors

Zhitong Finance APP has learned that analysts point out the market is in a "state of alert" as investors shift their bets from the riskier tech sector to defensive stocks.

Tech stocks—a key force behind the stock market's rally in recent years—have shown significant volatility in 2026. Concerns over artificial intelligence (AI), particularly regarding capital expenditure, cash flow, debt, and cyclical financing, have triggered market turbulence multiple times this year.

Last week, the Democratic Party swept Congress in the US midterm elections, further adding pressure to the sector.

As of the close on November 10, the tech-heavy Nasdaq Composite Index on Wall Street had risen about 7.9% since the start of the year, but gave back some of its gains in October, falling 5.3% that month. The index, which includes large tech companies like NVIDIA (NVDA.US), Microsoft (MSFT.US), Alphabet (GOOGL.US), and Apple (AAPL.US), has rebounded recently, but remains down in November, falling 1.5% so far this month and briefly entering correction territory last week.

The Nasdaq is not the only tech index that has seen a steep drop in the past month. South Korea's Kospi index, which is highly exposed to the semiconductor sector, fell 16.2% in October and has dropped more than 6% so far this month.

The MSCI Global Information Technology Index fell 7% in October and has dropped about 4% further so far this month. The MSCI USA Information Technology Index has fallen about 11% since October.

Meanwhile, defensive sector stocks have generally seen an uptick.

The MSCI indexes covering consumer staples, healthcare, and utilities—sectors widely viewed as more stable assets during periods of market volatility or uncertainty—have all risen sharply over the past month.

Alastair Pinder, Head of Emerging Markets and Global Equity Strategy at HSBC, said in a report on Monday that the recent market movements have been "extremely sharp and, in our view, have gone too far."

Speaking about the development of the AI industry, he said: "The market has already priced in higher implementation risks and expectations of delayed capital expenditure. The US semiconductor sector has seen valuations reduced by 45% since June, with the current 12-month forward P/E ratio at just 13.5 times. How much more negative news is still to be digested?"

He added that the sector's fundamentals remain broadly solid.

"The sector rotation and influx of capital into defensive sectors has reached an extreme," he noted. "Walmart (WMT.US) is trading at a forward P/E of 40, near historical highs, while NVIDIA is at just 13 times, close to historical lows."

Russ Mould, Investment Director at AJ Bell, said that judging by investors' sector allocation moves, the stock market is in a "state of alert."

He wrote in a research note on Monday: "This kind of sector rotation is highly significant and gives stock pickers useful reference points. As the old saying goes: Weak stocks in strong sectors often outperform quality stocks in weak sectors."

AJ Bell's analysis of the 11 primary sectors in the S&P Global 1200 Index shows that in the second half of 2026 so far, the energy sector has led the way, benefiting from higher oil prices due to US-Iran conflict. Healthcare and consumer staples sectors followed closely behind.

Data shows that the information technology sector was the top performer in the first half of the year, rising a cumulative 28.4%; but after moving into the second half, it has fallen more than 11%, becoming the worst-performing sector.

Mould commented: "The information technology sector has fallen from heaven to hell, going from the best-performing sector to the worst."

"The energy sector remains highly resilient, while consumer staples and healthcare are also resistant to declines; the industrial sector has clearly weakened. These trends reflect continued concerns over the economic outlook for next year and investor worry that the AI bubble is deflating."