NEW YORK CITY, New York: After months of a narrow rally powered by technology giants, investors are shifting course, rotating into cheaper, smaller companies as market volatility forces a reassessment of risk.
Market whipsaws have rattled some of the most crowded trades, prompting investors to rebalance portfolios away from volatile assets that had led gains in recent years. The shift has coincided with renewed strength in sectors previously left behind. On February 6, the Dow Jones Industrial Average hit a record high even as software stocks lost US$1 trillion over the week.
“The selloff in the names that carried markets higher may have paused, but we’re instead seeing a wave of aggressive buying of altogether different stocks,” said Tim Murray, capital markets strategist at T. Rowe Price.
Investors are increasingly scrutinising the risks associated with AI hyperscalers such as Amazon, Microsoft, and Alphabet, as well as the downside for companies whose business models could be disrupted by artificial intelligence, Murray said.
“Now, they’re all chasing to buy cheaper companies, perhaps indiscriminately,” he added.
Small-cap Stocks Gain Momentum
After years in which megacap technology stocks dominated the U.S. bull market, investors are increasingly betting that the rally will broaden to include industrials, healthcare, and small-cap companies.
“I think the broadening we started to see back in the fall and saw most dramatically in the last few days is here to stay after a very protracted period where anything that wasn’t megacap technology was pushed to the sidelines,” said Simeon Hyman, global investment strategist at ProShares. “Dividend growth, equal-weighted indexes, and smaller companies are all likely to be beneficiaries.”
Risk reassessment has also spilled into other once-hot assets. Bitcoin briefly slid to a 16-month low of $60,017 before recovering to just under $70,000 on February 7, still well below its October record of $126,000. Precious metals and other speculative assets have also seen sharp swings.
“People are reacting to the various reasons that have hurt all of these assets by looking for ways to rebalance their portfolios and move away from the most crowded trades,” said Jim Carroll, a wealth adviser at Ballast Rock Private Wealth. He cited “staggering” intraday volatility as investors search for shelter until markets “settle down.”
Persistent Doubts over AI Returns
Some market participants caution that the rebound does not signal a return to easy risk-taking. Instead, they say a more cautious tone has taken hold, with buyers slower to re-enter the market as previous market leaders.
“People are going to have strong doubts and questions going forward,” said Thierry Wizman, global FX and rates strategist at Macquarie Group. Those concerns include how hyperscalers will generate profits from heavy capital spending and the impact of AI on legacy businesses.
The iShares Expanded Technology Software ETF rebounded 3.5 percent but still ended the week down 9.1 percent. Silver also bounced but remains well below recent highs above $90 an ounce.
“The defensive stocks have really perked up, which I think is not just a short-term trade but a reflection of the unwind in speculative assets,” said Travis Prentice, chief investment officer at the Informed Momentum Company.
The result is a market increasingly split between longtime favorites and new areas drawing investor interest.
“While we’ve all been sitting here focused on this AI debate, the market already has been moving in a different direction,” said Scott Chronert, U.S. market strategist at Citigroup. “Instead, quietly, we’ve seen money move into energy stocks, materials companies, staples, and industrials.”
Those economically sensitive sectors are showing double-digit gains year-to-date, compared with a 1.3 percent rise for the S&P 500, Chronert said.
“We were expecting some market broadening, but not in this kind of numbing, turbulent way.”
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