The more the merrier is especially true during the holiday season. That applies to stocks, too.
After years of artificial intelligence leading then market’s rally, it appears that investors are finally looking beyond that area of tech and its beneficiaries for opportunities, which means an increasing number of stocks are joining the party. As a bonus, they’re often cheaper, as well.
Multiple concerns, among them increasing debt, fierce competition, and execution risks, led to a selloff of AI stocks in mid-November. Although AI plays have since bounced off their lows, the real action has been elsewhere in the market—including riskier areas that show investors aren’t just hunkering down.
Even with AI’s revolutionary potential, growing concern is understandable.
“Some lenders and investors are cautioning against the risks, with Oaktree Capital Management LP co-founder Howard Marks warning that some data centers may be rendered uneconomic and some owners may go bankrupt,” wrote Mizuho Securities Managing Director, Equity Trading Daniel J. O’Regan in a Friday note.
Even if worst-case scenarios don’t play out, increased AI skepticism could just be a reaction to how bid up–and expensive–these stocks are.
Broadcom’s beat-and raise fourth-quarter earnings, posted after Thursday’s market close, nonetheless may have market participants thinking twice. “Investors’ early reaction to Broadcom suggests the AI crowd is getting tough to please,” wrote Joe Mazzola, Head Trading & Derivatives Strategist at Charles Schwab on Friday. “Arguably, the chip maker’s earnings exceeded most expectations, but shares fell nearly 6% ahead of the open.”
Given that Broadcom is already up some 200% from its spring lows which occurred in the wake of President Donald Trump’s April 2 tariff announcement, it might just be a case of all the good news already being priced in. Despite the impressive numbers, analysts are getting skeptical about Broadcom’s forecasted growth as investors look elsewhere.
The fact that both the Dow Jones Industrial Average and the S&P 500 notched record closes on Thursday while the Nasdaq Composite “wilted…reinforces ideas that rotation continues out of AI names and into sectors like small caps and financials,” Schwab notes.
That bodes well for the rally’s health. Extreme concentration is still a worry, given the fact that stocks in the Magnificent Seven still account for some 35% of the S&P 500’s market capitalization. But if a greater number of sectors in the index start performing well, it means overall gains can continue—even if AI lags.
“Even if [we’re] in a classic price bubble in the U.S., the S&P 500 is showing tremendous resilience and breadth of late,” wrote Rosenberg Research founder and president David Rosenberg. “The technical picture is solid with breadth measures improving and no divergences taking place today (unlike in 2000, 2007, and 2022)…The weakness in many of the large AI plays has only been met with a rotation trade into value, with the Dow, S&P 500, S&P 400, S&P 600, the Invesco S&P 500 Equal Weight ETF, and Russell 2000 indexes all making new highs.”
Renaissance Macro Research Chief Market Technician Jeffrey deGraaf wrote on Friday that the equal-weighted S&P 500’s record close on Thursday underscores “the more bullish rotation taking place…It suggests buying weakness, not aggressively chasing strength while keeping a more bullish disposition toward equities.”
A market finally interested in something other than AI? Sounds like a Christmas miracle.
Write to Teresa Rivas at teresa.rivas@barrons.com
