Wall Street shifts $9.3 billion from tech as rotation deepens

The stock market's long-dominant tech trade is giving way to healthcare, industrials and financials as investors pull a record $9.3 billion from technology funds.

Investors pulled a record $9.3 billion from US technology funds last week, rotating into healthcare, industrials and financials as the summer market leadership shifts away from AI winners.

"Rotation is happening and leadership is shifting," said Jonathan Krinsky, managing director and chief market technician at BTIG. "All of this suggests to us that the semi/AI trade still has meaningful downside, but money continues to find other places within equities."

The Magnificent Seven group of megacap tech stocks slid more than 12 percent in June, with Apple down 9.9 percent from its recent high — just shy of correction territory. The PHLX Semiconductor Index fell 8.1 percent last week, while the tech-heavy Nasdaq Composite dropped 4.6 percent. The S&P 500 declined nearly 2 percent. In contrast, the equal-weight S&P 500 gained 10.3 percent year-to-date, the Russell 2000 surged 21 percent, and the S&P 493 — the index excluding the Magnificent Seven — rose 13.7 percent.

The rotation raises the question of whether this marks a healthy broadening of the market or the beginning of a deeper correction. RBC Capital Markets lifted its 12-month S&P 500 target to 8,150 points, citing earnings growth and a supportive Federal Reserve. But David Laut, chief investment officer at Kerux Financial, warned that conditions are ripe for a correction with elevated valuations, continued geopolitical uncertainty, and low summer trading volume.

The shift is visible across multiple data points. Bank of America's weekly Flow Show report recorded the first overall outflow from US stocks since March, with tech bearing the brunt of the selling. The S&P 500's advance/decline line hit an all-time high even as the index posted a losing week, according to Ryan Detrick, chief market strategist at Carson Group — a sign that breadth is improving even as headline indices struggle.

Small-cap stocks, which trade near 20 times earnings compared with the S&P 500's 26 times, have been the primary beneficiaries. The valuation gap suggests that cheaper stocks are being rewarded as investors rotate away from the expensive megacap names that drove the market over the past three years.

Value Stocks Take the Lead

The Vanguard Value ETF, which charges an expense ratio of 0.03 percent, has emerged as a low-cost way to capture the rotation. Financials make up about 21 percent of the fund, followed by industrials at 16 percent and healthcare at 13 percent. Technology accounts for just 13 percent — far below its weight in the S&P 500. The fund's holdings trade at about 22 times earnings, below the broader market's 25 times, and yield about 1.9 percent.

"The fundamental backdrop remains supportive, with consumers still spending, businesses investing, and earnings expectations continuing to move higher," said Mark Hackett, chief market strategist at Nationwide. He described the current environment as "a period of consolidation beneath the surface" rather than the start of a major downturn.

Risks Loom as Summer Volatility Builds

The rotation could deepen over the summer months as bond yields rise and inflation pressures persist. The Federal Reserve's new leadership under Chairman Kevin Warsh, who prefers a tighter communication policy with fewer market signals, could exacerbate volatility. Lori Calvasina, head of US equity strategy at RBC Capital Markets, cautioned that "the path for stocks will not necessarily be a linear one," citing AI risks, earnings forecasts and Fed policy developments.

"We believe the market volatility seen so far in June is the tip of the iceberg," Laut said. "Staying underweight technology stocks is the name of the game for now."

This article is for informational purposes only and does not constitute investment advice.