Investors rushed out of the AI sector last week and rushed into materials, industrials, financials and healthcare, representing a sector rotation that could persist, Wall Street analysts say.
Oracle stock led AI’s latest selloff after the hyperscaler’s earnings report and spending forecast renewed fears about excessive capital spending.
Jeremy Siegel, Wharton professor emeritus and WisdomTree chief economist, said CNBC Friday that it is difficult to be certain about the current rotation of the stock markets because there have been “so many evasions in the past”.
“But as I said, this one is bigger in the sense that there are more things happening that cast doubt on the speed and cost-effectiveness of all AI development,” he added.
In Oracle’s case, recent delays in data center construction could actually be a bright spot if they slow spending, but there are still more questions than answers about AI’s profitability, Siegel said.
He pointed out that his research has shown that when companies increase their expenses faster than their revenues, they end up overexpanding, which affects their profits and stock returns.
“I’m not saying this is necessarily going to happen to AI, or certainly to all of AI, but it’s something to keep in mind,” Siegel cautioned.
Also on Friday, Bank of America Securities investment strategist Michael Hartnett said markets are pricing in an expected “overheating” scenario for next year by looking toward a Main Street trade comprised of mid- and small-cap stocks, while exiting a Wall Street trade comprised of mega-cap names.
Eric Teal, chief investment officer at Comerica Wealth Management, expressed a similar view in a note published Thursday, saying the market was dominated by momentum and AI stocks during the first eight months of the year.
But since then, concerns about valuations, margin sustainability and high debt levels have changed sentiment toward the tech sector.
Financial and healthcare stocks have been more attractive, while small caps and even “micro-cap stocks” will benefit from falling short-term rates, he added.
“More importantly, we expect this rotation in the early stages as relative valuations remain attractive,” predicted Teal.
