In a notable shift, investors are moving away from technology stocks and redirecting their capital towards health insurers, banks, and retailers. This rotation comes after a prolonged period of heavy investment in artificial-intelligence stocks, which were seen as a hedge against an economic slowdown that never materialized.
The labor market’s recent promising signs have reignited the rotation trade that previously gripped the stock market before the Iran war. This time, the shift is characterized by a different sectoral focus.
Market Dynamics and Sector Performance
On Friday, investors dumped major tech names that had driven the S&P 500 and Nasdaq Composite to record highs. The surge in Treasury yields following a strong jobs report for May has altered the market narrative once again. The odds of a Federal Reserve interest-rate hike have increased, raising concerns about the central bank being behind the curve.
Higher interest rates would make financing the billions of dollars spent on AI chips and infrastructure more expensive. There’s no guarantee that such spending will translate into actual profits. Meanwhile, health insurers, banks, and retailers have taken the lead, suggesting that investors believe the AI trade has run its course.
Mike O’Rourke, chief market strategist at Jones Trading, noted that investors are taking profit in one group, but don’t want to get out of the tape. Instead, they are recycling and rotating their money into other stock sectors, favoring recently oversold groups such as financials and healthcare.
Sector-Specific Gains
In a week that saw the market-cap-weighted S&P 500 fall 2.6%, the equal-weighted version of the index was off just 0.5%. The S&P 500’s healthcare sector was one of the best performers, up 2.3%, while the financials sector rose 1.3%. The real-estate and consumer-staples sectors also saw gains of 1.5% and 1%, respectively, according to FactSet data.
Economic Indicators and Market Sentiment
Shawn Severson, CEO and co-founder of Water Tower Research, pointed out that technology companies, caught in a supercycle of their own, don’t necessarily reflect the broader economy. They emerged as a safety trade when the macro picture looked dire over the past year. Many nontech names, however, are truly much more economically dependentso a solid growth backdrop can lift all boats.
May’s robust jobs report sent the 10-year Treasury yield to 4.537%, its highest level in two weeks. The policy-sensitive 2-year Treasury rate surged 15 basis points to 4.16%, its highest level since February 2026. Higher yields typically put downward pressure on tech stocks because their valuations are heavily tied to future expected earnings.
Steve Sosnick, chief strategist at Interactive Brokers, remarked that Technology had sucked so much of the oxygen out of the rest of the market. He highlighted that Alphabet had indicated it was cheaper to raise money by selling stocks than by going to the debt markets. This raises risks for technology valuations, which have reached extremes.
Consumer Sentiment and Inflation Concerns
While May’s strong jobs report should underpin economic optimism, recent labor-market data may be telling an incomplete story. U.S. consumers’ purchasing power is shrinking, with average hourly earnings up 3.4% annually, but consumer prices up 3.8% versus a year ago.
George Catrambone, head of fixed income at DWS Asset Management, noted that wages are not keeping up with inflation, explaining why consumer sentiment is at an all-time low. He believes the market is more concerned about inflation than growth and that investors should be pricing in the negative growth and consumption effects.
Catrambone also argued that the current inflation problem is driven mainly by an energy supply shock brought on by the U.S.-Iran war, rather than by excessive consumer demand. Therefore, a rate hike by the Fed would not effectively bring down inflation.
The next big test for markets will be the consumer-price index and producer-price index reports for May. All eyes will be on continued inflation metrics, which are expected to remain elevated as long as the war is ongoing.
