The Great Rotation – Big Tech Has Stopped Being the Only Trade in Town
For the better part of two years, investing felt deceptively simple: buy the Magnificent Seven and wait. Nvidia, Microsoft, Meta, Amazon, Alphabet, Apple and Tesla carried the S&P 500 – the benchmark tracking the performance of the top 500 largest publicly traded companies in the United States (US) – from one record high to the next, powered by the artificial intelligence (AI) spending frenzy that consumed Wall Street’s imagination. That trade has started to unravel in 2026, and the pace of the unwind accelerated sharply this week.
The numbers tell the story. Technology is the worst-performing sector in the S&P 500 year-to-date, down roughly 0.4%, while energy has surged over 14% and materials have climbed nearly 9%. Small-cap stocks have gained over 5% since January, compared to a mere 0.5% for large caps. The iShares Expanded Tech-Software Sector exchange traded fund (ETF) has fallen around 19% since the start of the year, its worst stretch since 2008.
Meanwhile, the Dow Jones Industrial Average – heavy with “old economy” names – pushed above 49,500 on Wednesday as the tech-heavy Nasdaq slumped 1.5%. This is not a broad market decline. It is an investment reallocation, and it is gaining momentum.
Investors Need More Than Faith
The catalyst behind the shift is twofold: massive capital expenditure commitments that are testing investor patience, and valuations that leave no room for disappointment. The five major hyperscalers – Amazon, Microsoft, Alphabet, Meta and Oracle – are projected to spend roughly $602 billion on infrastructure in 2026, a 36% increase from 2025, with approximately 75% of that directed at AI.
Capital intensity has reached 45% to 57% of revenue for some of these firms, ratios that resemble utilities or heavy industry rather than technology companies. Alphabet’s fourth-quarter earnings this week put a fine point on the issue, with 2026 capex guided at $175 billion to $185 billion – far above expectations. The stock slipped despite beating revenue and earnings forecasts.
Investors are no longer willing to accept spending at this scale on faith. The question of when and whether these investments generate adequate returns has moved from theoretical to pressing. Mega-cap tech earnings growth has slowed sharply, while valuation multiples remain elevated, pushing investors to look elsewhere.
The Structural Concerns
The rotation gained fresh impetus from an unexpected direction. Anthropic launched automation plugins for its Claude Cowork platform, including a legal tool capable of automating contract review and compliance processes. The result was a violent selloff across software and professional services stocks.
Thomson Reuters fell 18%, LegalZoom dropped nearly 20%, and RELX plunged 14% in a single session. The selling spread globally, hitting SAP, Wolters Kluwer, Publicis, TCS and Infosys. Asset managers with software exposure were also caught in the downdraft. Roughly $285 billion in market value was erased in two days.
The deeper concern is structural. AI companies are increasingly moving into the application layer, competing directly with established enterprise software. If large language models can replicate SaaS offerings, the pricing power that underpinned the sector’s premium is at risk.
Not everyone agrees. Nvidia CEO Jensen Huang dismissed the idea that AI would replace software, while JPMorgan and Box executives argued that mission-critical systems are not easily displaced. The market, however, is pricing disruption first.
Where Is the Money Going?
Gold, metals and mining stocks have performed strongly as investors rotate toward real assets and tangible cash flows. Small and mid-cap stocks are benefitting from lower borrowing costs, fiscal tailwinds and narrowing earnings differentials with mega-caps.
The earnings gap between the Magnificent Seven and the rest of the S&P 500 is closing, weakening the case for extreme concentration. The era of blind faith in AI spending is giving way to a demand for measurable returns. In 2026, diversification is once again proving its value.
A Look at the Markets
The Week’s Key Themes
- Weak US labour data bolsters the case for a June rate cut
- Wall Street futures slide after Amazon’s selloff
- Precious metals remain volatile
- The rand weakens, but the broader backdrop remains supportive
Bonds
- United States: The US 10-year Treasury yield drifted toward 4.2% after softer labour-market data reinforced expectations for a June rate cut.
- United Kingdom: UK gilt yields fell after a dovish Bank of England hold, with four policymakers voting for an immediate cut.
- Euro Area: German bund yields eased as inflation data reinforced expectations of convergence toward 2%.
- South Africa: South African bonds remain well supported, with the 10-year yield near its lowest levels since 2018.
Indices
- United States: US equity futures weakened, led by big tech after Amazon flagged sharply higher AI-related capex.
- United Kingdom: The FTSE 100 retreated as miners, banks and energy stocks came under pressure.
- Europe: European equities closed lower amid disappointing earnings and cautious ECB messaging.
- South Africa: The FTSE/JSE All Share experienced sharp volatility before stabilising mid-week.
Commodities
- Precious Metals: Gold and silver were marked by extreme volatility, with silver suffering its sharpest collapse since 1980.
- Base Metals: Copper softened on rising inventories and slowing Chinese demand.
- Energy: Brent crude drifted lower amid easing geopolitical risk and signs of oversupply.
Currencies
- US Dollar: The dollar remained supported amid risk-off sentiment and expectations of cautious Fed easing.
- Euro and Sterling: The euro stabilised, while sterling weakened following a dovish Bank of England tone.
- South African Rand: The rand softened amid commodity weakness, though longer-term support remains intact.
Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.18
EUR/ZAR: 19.06
GBP/ZAR: 21.94
Gold: $4,866.70
Brent crude: $68.27
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes
Sources: Bloomberg, Investing.com, Reuters, Trading Economics and TradingView
