A noticeable rotation away from artificial‑intelligence‑centric stocks appears to be gaining momentum across U.S. equity markets.
John Davi, chief executive officer and chief investment officer of Astoria Portfolio Advisors, told CNBC’s ETF Edge that a broader set of equities is finally receiving a “green light” as liquidity returns to the financial system.
“The Federal Reserve cut rates four times last year and has already trimmed rates twice this year. Another cut is likely in December or January,” Davi said. “Historically, rate reductions usher in a new market cycle, and sector leadership tends to shift quietly.”
He highlighted recent performance in several non‑technology categories. The iShares MSCI Emerging Markets ETF (EEM) is up roughly 17 % over the past six months, while the Industrial Select Sector SPDR Fund (XLI) has gained about 9 % in the same period.
“These segments can serve as a hedge against an over‑priced large‑cap tech exposure that dominates many portfolios,” Davi added. “We are operating in a structurally higher‑inflation environment, and the Fed’s easing makes it hard to justify concentrating risk in just a handful of stocks.”
Davi favors a globally balanced portfolio rather than an overweight position in the so‑called “Magnificent 7” — Apple, Amazon, Meta Platforms, Nvidia, Microsoft, Tesla and Alphabet — which collectively account for roughly one‑third of the S&P 500 and are trading near historic highs.
Sophia Massie, chief executive officer of ETF issuer LionShares, echoed the caution. “Analysts have a rough sense of how AI will impact the economy, but we still lack a clear view of which companies will emerge as dominant players,” Massie said. “The market is pricing in a scenario where a single firm could dominate AI, and that concentration risk is unsettling.”
Deeper market implications
The anticipated Fed cuts are expected to boost short‑term borrowing costs, which historically benefits cyclical sectors such as industrials, materials and emerging‑market equities. Those areas tend to outperform when capital becomes cheaper and corporate earnings prospects improve.
At the same time, AI‑centric mega‑caps have seen valuations climb to levels that exceed historical norms for growth stocks. Price‑to‑earnings multiples for the Magnificent 7 are running well above the S&P 500 average, raising concerns about earnings sustainability once the initial hype subsides.
Investors are therefore recalibrating risk by adding exposure to assets that offer more attractive dividend yields and lower beta, such as emerging‑market sovereign bonds or infrastructure‑linked ETFs. This shift also aligns with a broader “risk‑parity” approach, where portfolio weightings are adjusted based on volatility rather than market cap.
From a technology standpoint, AI remains a transformative force, but its monetization is still in early stages. Companies that can integrate AI into existing product lines and generate recurring revenue streams are likely to justify premium valuations, whereas pure‑play AI firms without clear paths to profitability may face sharper corrections.
Ultimately, the market appears to be moving toward a more diversified allocation, balancing the upside potential of AI breakthroughs with the defensive qualities of traditional sectors. As liquidity improves and interest rates continue to ease, investors will have greater flexibility to rotate capital into areas that offer both growth and value characteristics.
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