Something interesting happened this week on Wall Street: the Dow Jones Industrial Average surged to record highs while the Nasdaq slumped. That divergence tells a story. After two years of AI-fueled euphoria, investors are rotating out of the tech trade and into sectors that actually make money from tangible economic activity. Materials, industrials, financials, and healthcare are suddenly in vogue. The magnificent seven are not.
BTIG’s Jonathan Krinsky put it bluntly in a recent note: the AI trade is starting to look “toppy.” His technical analysis identified a troubling pattern in the AI Basket, which has put in a “lower low” and “lower high” over the last few months. “That is the precursor for a topping process,” the chief market technician wrote.
He’s careful to add the caveat that it’s “hard to say this is ‘the’ top.” But the price action in recent sessions suggests something more than routine profit-taking. Broadcom dropped more than 5% on Monday. Oracle fell more than 2%. AMD, Micron, and Microsoft all saw losses. Investors moved instead to areas more sensitive to the economy: consumer discretionary, industrials, and healthcare.
The Oracle Earnings That Spooked Everyone
Oracle’s December earnings report may have been the catalyst that crystallized investor anxiety. The company posted results that weren’t terrible by traditional metrics, but the guidance revealed something concerning: dramatically increased capital expenditure targets for AI data center buildouts. The market’s reaction was swift and punishing.
The broader concern isn’t about Oracle specifically. It’s about what happens when companies with weaker balance sheets keep raising spending projections without demonstrating that the investment will generate proportional returns. Oracle’s debt-to-equity ratio has reached 500%. The company would need more than seven years of operating income to pay off its current debt load. Bond markets are already pricing Oracle debt like junk.
Jeremy Siegel, the Wharton professor emeritus and WisdomTree chief economist, acknowledged the pattern in a CNBC interview. He noted there have been “so many head fakes in the past” with rotation trades that didn’t stick. “But this one has more legs in the sense that there are more things that are happening that throw doubt on how fast or how profitable all the AI buildout is going to be,” he added.
The Valuation Problem Nobody Wants to Talk About
The fundamental challenge facing AI stocks is straightforward: three years of massive capital expenditures haven’t yet produced proportional revenue. The hyperscalers keep raising their capex guidance. Alphabet and Meta lifted their forecasts in recent quarters. Microsoft and Amazon said they would continue investing heavily. But concrete business models and tangible returns from generative AI remain elusive.
Bill Gates has publicly warned about the “hyper-competitive” AI industry and the potential for significant value loss in expensive tech stocks. That’s not a random skeptic. That’s someone with deep relationships across the tech industry sounding an alarm.
Companies with cash flows heavily weighted in the distant future are particularly sensitive to changes in discount rates. The Fed’s messaging around rate cuts has been cautious, and any sign that rates will stay higher for longer disproportionately hits growth stocks. When uncertainty around December rate cuts intensified, AI-related stocks experienced sharp sell-offs, with Nvidia and Amazon both seeing intraday declines of over 8%.
Where the Money Is Going
The rotation out of AI isn’t random selling. It’s strategic repositioning into sectors that benefit from near-term earnings visibility rather than long-duration growth stories. Investors who rode the AI wave are taking profits and moving into value plays that got left behind during the tech surge.
The financial sector benefits from any scenario where rates stay elevated longer than expected. Industrials benefit from infrastructure spending and potential reshoring trends. Healthcare offers defensive characteristics and demographic tailwinds that don’t depend on AI hype panning out. Materials benefit from construction activity, including ironically the data center buildout itself.
This is the kind of sector rotation that tends to have staying power because it’s driven by fundamentals rather than sentiment. Institutions aren’t just nervous about AI valuations. They’re seeing better risk-adjusted opportunities elsewhere.
The Technical Picture Looks Concerning
Price patterns don’t lie, even if they don’t predict the future perfectly. The AI Basket’s lower lows and lower highs that Krinsky identified represent a deteriorating trend. Broadcom, which had been one of the strongest AI plays, is now down roughly 18% from recent highs. Oracle has underperformed despite the TikTok deal announcement.
The problem for bulls is that each rally attempt has failed to surpass the previous high, while each pullback has established a lower floor. That’s the textbook definition of a topping pattern. It doesn’t mean prices can’t rally. But it does mean the path of least resistance has shifted.
RBC Wealth Management’s technical strategist argues that investors should expect more volatility and smaller stock gains in 2026, noting that the S&P 500 is trading near the upper end of a long-running trend channel. For AI stocks specifically, the implication is that the easy money has been made.
What This Means for Investors
The healthiest outcome would be for AI stocks to consolidate sideways while fundamentals catch up to valuations. That would allow the companies to grow into their multiples without a crash. The concerning outcome would be a sharp correction that takes broader markets down with it, given how much index weight is concentrated in a handful of tech names.
For now, the market seems to be choosing door number one: a controlled rotation rather than a panic. That’s actually good news for overall market stability, even if it’s painful for investors who are overweight AI.
The question going into 2026 is whether the hyperscalers can start showing returns on their massive infrastructure investments. If they can, this rotation will look like a temporary pause in a secular growth story. If they can’t, Krinsky’s “topping process” warning will seem prescient.
The smart money isn’t betting against AI as a technology. It’s betting that valuations got ahead of reality and that other sectors deserve a turn. That’s not bearish on innovation. It’s just bearish on paying 40 times earnings for promises that haven’t materialized yet.
