Investors exited artificial intelligence trades last week and piled into materials, industrials, financials and health care, representing a sector rotation that could have staying power, Wall Street analysts said.
Oracle Stock Leads Latest Artificial Intelligence Sell-Off That comes after the hyperscaler’s earnings report and spending guidance reignited concerns about excessive capital spending.
Jeremy Siegel, professor emeritus at the Wharton School and chief economist at WisdomTree Friday on CNBC It’s hard to pinpoint the current stock market rotation because “there was so much falsehood in the past.”
“But as I said, there’s more basis for this question in the sense that there’s more going on that calls into question the speed or profitability of all AI buildout,” he added.
For Oracle, recent delays in data center construction could actually be a glimmer of hope if they slow spending, Siegel said, but there are still more questions than answers about the profitability of AI.
He noted that his research shows that when companies’ spending grows faster than revenue, they eventually overextend, hurting profits and stock returns.
“I’m not saying this will necessarily happen to AI or all AI, but it’s important to keep in mind,” Siegel warned.
Also on Friday, Bank of America Securities investment strategist Michael Hartnett said the market will shift toward Main Street trading, which consists of small and mid-cap stocks, while exiting Wall Street trading, which consists of large-cap stocks, and expects “red-hot” conditions next year.
Eric Teal, Chief Investment Officer Allied Signal Corporation Wealth managers took a similar view in a report on Thursday, saying the market was dominated by power and artificial intelligence stocks in the first eight months of the year.
But since then, concerns about valuations, profit sustainability and high debt have changed the mood in the tech sector.
He added that financial and health care stocks are more attractive, while small and even “microcap” stocks will benefit from lower short-term interest rates.
“More importantly, we expect this rotation to occur at an early stage, with relative valuations still attractive,” Thiel predicted.