Wall Street Is Falling Out of Love With the AI Trade — Here's Why

The S&P 500’s headline calm has masked a sharp internal reshuffle, with money rotating away from crowded AI-linked trades as investors start demanding clearer evidence that heavy spending will turn into profits, according to JPMorgan Private Bank’s Global Investment Strategist, Kriti Gupta.

That shift is playing out even as aggregate earnings growth reached 47.4% and beat early estimates, offering a fundamental counterweight to the pressure on speculative tech.

In a recent note, Gupta explained that the S&P 500 has hovered near record territory while the equal-weight version pushed to a new high, a split that points to leadership changing beneath the surface.

The note described it as one of the biggest rotations in years, with earlier winners slipping and lagging, while more cyclical areas are catching bids.

Why Sector Rotations Signal Market Shifts Chips have been a focal point of the reversal: the Philadelphia Semiconductor Index fell nearly 24% from late June, while healthcare gained roughly 9% and financials rose about 5% over the same stretch.

Gupta framed the move less as a broad market breakdown and more as investors re-sorting which parts of the economy can deliver returns sooner.

Another sign of the rotation: overall index volatility has stayed relatively contained, but tech volatility has jumped, reflecting how quickly crowded trades can unwind when the narrative changes.

At the same time, the S&P 500 posted a two-day rebound to around 7,490, still below the 7,616 high, after a Federal Reserve decision that kept rates at 3.50% to 3.75% with three officials voting for an increase.

Are Tech Stocks Losing Their Luster? Gupta argued the pullback in technology is better understood as a reset in the economics of AI, with markets no longer paying up for spending alone in a higher real-rate world.

She pointed to intensifying competition among frontier models and more capable open-source options as factors pushing investors to ask who captures value, how quickly, and at what capital cost.

This comes amid concerns of whether AI leaders can turn cloud-driven growth into durable margins that justify valuation multiples.

That question has been front and center as four "Magnificent Seven" companies reported, with results supported by cloud businesses such as Amazon.com Inc.’s (NASDAQ: AMZN ) AWS, where revenue rose 37% year over year, and Microsoft Corp.’s (NASDAQ: MSFT ) Azure, which grew 42% for the quarter.

Read Also: Elon Musk Says Mars Could Shield Humanity From Deadly Pandemics, Rogue AI — And Maybe Even Lead Us to Aliens Rates are part of the pressure test: Gupta tied the rotation to a change in the Fed’s tone and a jump in real yields, noting that long-duration growth assets become more sensitive when discount rates rise.

She highlighted that momentum in the AI complex peaked after Chair Kevin Warsh ’s June debut and said 10-year real yields moved 27 basis points across six weeks.

How Earnings Trends Are Reshaping Investments Gupta said what could steady the AI trade is clearer proof that spending is producing measurable business results, pointing to emerging signs of productivity-led margin improvement across corporate America.

Gupta added in the note that another marker would be a return to a market where strong earnings beats are rewarded with rising share prices, rather than declines that signal investors are de-risking.

The earnings backdrop has been unusually strong, with FactSet data showing 61% of S&P 500 companies have reported and the blended growth rate has climbed to 47.4%, far above an initial 32% estimate, the strategist said in the note.

Valuation has also entered the debate, with FactSet putting the S&P 500 at 19.6 times forward earnings versus a five-year average of 19.9 and a 10-year average near 19.

Strategists have pointed to that setup in targets such as Goldman Sachs’ 8,000 call and Wells Fargo’s 7,950 forecast.

Even inside AI-heavy areas, pricing has compressed alongside growth, with Nvidia’s forward multiple around 20 despite revenue growth above 80% and Micron trading below 20 times forward earnings.

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