Stock Rotation Hits Tech Giants as Small Caps Rise: Markets Wrap

(Bloomberg) — A tech selloff dragged down stocks from near-record levels amid a rotation into more economically sensitive industries. A flare-up in geopolitical risks lifted oil while gold bounced after a historic rout. Bitcoin hit the lowest since President Donald Trump’s election victory.

The plunge in software makers weighed on trading as Anthropic’s automation tool heightened concerns their core businesses are at risk. The S&P 500 fell 0.8% and the Nasdaq 100 slid 1.6%. In late hours, Advanced Micro Devices Inc. gave a disappointing forecast. Energy firms joined crude higher as the US Navy shot down an Iranian drone headed toward an aircraft carrier in the Arabian Sea.

Despite losses in major benchmarks, most shares in the S&P 500 actually rose. FedEx Corp. – an economic barometer – extended a record-breaking rally. Walmart Inc. topped $1 trillion.

“Rotation is occurring,” said Steve Sosnick at Interactive Brokers. “The tricky question is whether it is a benign reallocation of exposure or a sign of some underlying instability.”

Bets on AI companies have dominated the US equity market for three years, but a growing number of investors are now wagering that run, led by the “Magnificent Seven” megacaps, is giving way to broader market participation. In fact, a violent rotation has taken place in 2026, with value shares far outpacing growth.

“Our sense is that markets are churning underneath the surface as worries over AI capital spending battle with ‘hopes and dreams’ of broadening out as a result of an accelerating US economy,” said Chris Senyek at Wolfe Research.

In another sign of rotation, an equal-weighted version of the S&P 500 — which gives Dollar Tree Inc. as much clout as Apple Inc. —edged only mildly lower. The Russell 2000 of small firms added 0.3%. At the same time, the group of software shares in the US equity benchmark tumbled almost 4%.

The dollar dropped after notching its biggest back-to-back advance since April. Treasuries barely budged, with investors parsing the latest remarks from central bank speakers.

Federal Reserve Bank of Richmond President Tom Barkin said policy easing has bolstered the jobs market as officials now look to bring inflation back to the target. Fed Governor Stephen Miran said the absence of strong price pressures means rates need to be lowered again this year.

While the trend in equities remains positive, it has become somewhat more guarded with the weakness in tech, according to Louis Navellier at Navellier & Associates.

The first wave of selling was in stocks associated with legal software and data services as shares of Experian Plc, London Stock Exchange Group Plc and Thomson Reuters Corp. tumbled. Then it snowballed to include most of the software sector, pushing the iShares Expanded Tech-Software Sector ETF down about 4.5%.

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“Bifurcated action is characterizing today’s Wall Street trading, as tech surrenders the floor to cyclicals even as Palantir delivered a blockbuster beat-and-raise last night, which initially boosted optimism regarding AI prospects,” said Jose Torres at Interactive Brokers.

Small caps, meanwhile, are outperforming as they are relatively sensitive to economic health, he added.

“Despite elevated volatility across the macro landscape, the underlying structure of this market is clear: We are in a ‘rotational’ bull market,” said Craig Johnson at Piper Sandler. “Capital is rotating into cyclicals and value stocks.”

Optimism that the American economy is set to take off has fueled the rotation, with companies whose fortunes are closely tied to the business cycle attracting investor cash. At the same time, AI investing has become less monolithic in the tech sector, with investors starting to choose winners and losers.

“We are shifting our tactical allocation from neutral to favoring ‘value’ over ‘growth’,” said Ed Clissold and Thanh Nguyen at Ned Davis Research. “Several of the factors we said we were watching when we moved to neutral have moved in value’s direction.”

The strategists noted that earnings growth from value stocks has exceeded expectations. While results from tech megacaps were in line or better than expected, market reaction to their spending plans varied wildly.

“We view the challenge for some ‘Magnificent Seven’ stocks as more of a valuation issue than an earnings growth issue,” they said. “If economic growth moderates in the second half of 2026 as our macro team expects, investors may return to paying a premium for companies that can deliver earnings-per-share growth.”

Given the massive capex spend by hyperscalers, the premium may be less than in 2021-2025, but we do not rule out a return to the growth premium trade later this year, which would necessitate a rotation back into growth stocks, they concluded.

“We have seen a more nuanced view of AI recently, with skepticism and optimism more balanced,” said Mark Hackett at Nationwide. “Skepticism is warranted given the enormous sums of money being spent with uncertain returns on investment, along with the greater use of debt.”

After Microsoft Corp.’s cloud revenue growth fell short of expectations, investors are now looking to Amazon.com Inc.’s and Alphabet Inc.’s results this week for insights into productivity gains, revenue generation, and margin growth, according to Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.

“With continued demand, durable spending, and encouraging monetization trends, we believe AI will remain a key engine of overall equity performance,” she said. “We also expect beneficiaries to continue to broaden to the application layer of the AI value chain as well as users of the technology in other sectors.”

Her firm expects the S&P 500 to move higher, and maintains its December price target of 7,700. The gauge closed at 6,917.81 Tuesday.

“We recommend investors position for a broadening rally, favoring financials, health care, utilities, and consumer, discretionary beyond the tech sector,” Hoffmann-Burchardi said.

Last week’s tech selloff saw lofty expectations for cloud revenues – now a proxy for how well AI is being monetized – disappointed, noted Lauren Goodwin at New York Life Investments.

“We are in the earliest days of AI, and monetization of these capabilities is a moving target,” she said. “Instead of near-term AI revenues, we are looking for ongoing capex commitments from AI hyperscalers to assess the resilience of the AI boom, and we continue to see physical investment plans expand.”

Among the most-recent investments in the space, Elon Musk is combining SpaceX and xAI in a deal that values the enlarged entity at $1.25 trillion, as the world’s richest man looks to fuel his increasingly costly ambitions in AI and space exploration.

And this past Sunday, Oracle Corp. said it plans to raise $45 billion to $50 billion this year through a combination of debt and equity sales to build additional cloud infrastructure capacity, reflecting the scale of financing needed to feed AI’s growth.

The announcement — and a subsequent bond sale Monday — coincided with persistent fears about whether massive AI-linked investments by tech companies will pay off.

“The biggest concern about the AI revolution is that tech companies are spending hun-dreds of billions on AI infra-structure, without any guarantee that it will produce a positive ROI (Return on Investment),” said Tom Essaye at The Sevens Report.

“I’ve often compared the current AI revolution to the rollout of electricity in the country, where the industrialists of the 20th century funded the wiring of the country. Well, what if people preferred candles and didn’t buy electricity? They would have lost the equivalent of billions,” he said.

Meantime, retail traders’ appetite for US equities faces a tough test as the record buying wave that powered last month’s rally shows signs of fatigue.

January net inflows ran more than 50% above the same period last year, according to Citadel Securities data. That pace of buying from the retail crowd is difficult to maintain — particularly in February, a seasonally slower month for equities — according to Scott Rubner, head of equity and equity derivatives strategy at the firm.

“We expect global equities to rise around 10% by the end of this year, and investors who have concentrated positions in the US should benefit from diversifying into other markets,” said Mark Haefele at UBS Global Wealth Management. “Ultimately, we believe one of the most effective ways to manage macroeconomic uncertainty and market volatility is to ensure portfolio diversification.”

Corporate Highlights:

Palantir Technologies Inc.’s revenue forecast for fiscal 2026 that significantly exceeded Wall Street expectations, a boost for the data analytics company after its shares have gotten off to a lackluster start so far this year. Nvidia Corp. Chief Executive Officer Jensen Huang said that the massive build-out of artificial intelligence capacity, which is currently straining the power grid in many locations, will eventually lead to cheaper energy costs. Netflix Inc. and Warner Bros. Discovery Inc. faced a skeptical Senate panel Tuesday as their executives defended their $82.7 billion media merger against lawmakers’ concerns about the proposed tie-up and its impact on streaming consumers and Hollywood workers. Walt Disney Co. said Josh D’Amaro will succeed Bob Iger as chief executive officer of the entertainment giant, passing the reins at a key moment in the company’s history and after struggles to find a new leader in the past. Paramount Skydance Corp. Chief Executive Officer David Ellison turned down an invitation to testify before the Senate at an antitrust hearing about the proposed tie-up between Netflix Inc. and Warner Bros. Discovery Inc. Bank of America Corp. priced $7 billion sale of investment-grade bonds, adding to a flurry of offerings by major Wall Street banks. Banco Santander SA agreed to acquire Webster Financial Corp. for $12 billion as Spain’s largest bank bets big on the US. PayPal Holdings Inc. said HP Inc. Chief Executive Officer Enrique Lores will take the top job from Alex Chriss, whose turnaround plan failed to meet targets and streamline the sprawling payments business. Chipotle Mexican Grill Inc.’s doldrums are set to extend into 2026, with the burrito chain offering a full year-sales target that fell short of Wall Street’s expectations. PepsiCo Inc. is cutting prices by as much as 15% for key brands, including Lay’s and Doritos, in a bid to lift sales by offering more affordable products. Archer-Daniels-Midland Co. sees emerging US biofuels policy as the key to its outlook for 2026, as weak crush margins continue to weigh on the company’s results. Amgen Inc. exceeded fourth-quarter expectations on strong sales of its biggest medicines, and forecast 2026 performance that aligns with what Wall Street is anticipating, positive results for the company as it faces rising challenges from rivals. Pfizer Inc. revealed data from one of its new obesity treatments early Tuesday with little detail, leaving investors wondering if the up to $10 billion it spent purchasing the company that created the medicine will pay off. Merck & Co. forecast 2026 sales and profit that missed Wall Street’s expectations and said its HPV vaccine Gardasil may remain off the market in China this year as it continues to face challenges in the once-hot market for its shot. Novo Nordisk A/S said its sales will drop this year as its blockbusters Ozempic and Wegovy face ever-tougher competition and the company gets hit by the US government’s push to cut drug prices. The US Food and Drug Administration turned down a self-administered version of AstraZeneca Plc’s lupus medicine, but the UK drugmaker said it’s still working with regulators to advance the request. Uber Technologies Inc. is rolling out its ride hailing service in the Chinese gambling hub of Macau, expanding into a new Asian market for the first time in years. Billionaire Michael Novogratz said he remains optimistic even after Galaxy Digital Inc. posted a wider-than-expected loss of almost $500 million during the crypto market’s fourth-quarter crash. The crypto exchange Kraken, which is planning to go public, saw revenue and earnings fall sequentially in the fourth quarter while digital asset prices tumbled and investor demand plummeted. Ivanhoe Mines Ltd. is looking to supply the US with minerals mined in the Democratic Republic of Congo as the Trump administration moves to build strategic stockpiles and loosen China’s grip on global supply chains. Mercuria Energy Trading SA has signed a 20-year agreement to buy liquefied natural gas from the US through Commonwealth LNG’s planned facility in Louisiana, as the trading house looks to bolster its gas positions globally. Siemens Energy AG will invest $1 billion (€847 million) in manufacturing capacity in the US over the next two years as power demand surges. Nintendo Co.’s profit rose a smaller-than-expected 23% after the US levied tariffs on the Switch 2 console, revealing a big hit to margins while concerns grow about the impact of soaring memory chip prices in 2026. What Bloomberg Strategists say…

“Tuesday’s equity price action indicates market participants still believe in the reacceleration story despite increased geopolitical headwinds and AI disruptions. Major equity indexes have sped up their move lower on an already weak day after tensions between the US and Iran came back into focus. But under the surface, value is outperforming growth, while equal weight is holding up better than the cap-weighted SPX. Small caps are again outperforming mega-cap tech.”

—Michael Ball, Macro Strategist, Markets Live. For the full analysis, click here.

Some of the main moves in markets:

Stocks

The S&P 500 fell 0.8% as of 4 p.m. New York time The Nasdaq 100 fell 1.6% The Dow Jones Industrial Average fell 0.3% The MSCI World Index fell 0.3% Bloomberg Magnificent 7 Total Return Index fell 1.5% The Russell 2000 Index rose 0.3% S&P 500 Equal Weighted Index fell 0.2% Currencies

The Bloomberg Dollar Spot Index fell 0.3% The euro rose 0.3% to $1.1824 The British pound rose 0.2% to $1.3699 The Japanese yen was little changed at 155.73 per dollar Cryptocurrencies

Bitcoin fell 2.7% to $76,344.45 Bonds

The yield on 10-year Treasuries declined one basis point to 4.27% Germany’s 10-year yield advanced two basis points to 2.89% Britain’s 10-year yield advanced one basis point to 4.52% The yield on 2-year Treasuries was little changed at 3.57% The yield on 30-year Treasuries declined two basis points to 4.90% Commodities

West Texas Intermediate crude rose 3% to $64.03 a barrel Spot gold rose 6.2% to $4,951.15 an ounce ©2026 Bloomberg L.P.