US Tech Rebounds Strongly, but Questions Linger Over the Great Investment Rotation

Just one month ago, it looked like the glory days might finally be over for US technology stocks, as investors trembled at the prospect of a mighty artificial intelligence bubble. Experts were increasingly urging investors to reduce their exposure by looking beyond the mega-caps towards banks, industrials, smaller companies and emerging markets. Many needed little encouragement. They looked at the trillions being poured into AI infrastructure and wondered whether highly leveraged hyperscalers such as Alphabet, Amazon, Meta and Microsoft would ever get a return on that investment.

The so-called Magnificent Seven and other tech hopefuls have had it their way for long enough, leading experts to quickly coin a name for the shift: the great rotation. But there was one problem: it wasn’t so great. Within weeks, investors were rotating back into technology, with renewed AI enthusiasm sending the Nasdaq careering towards fresh highs.

This isn’t the first time investors have stepped back from big tech. According to Jason Hollands, managing director of investment platform Bestinvest by Evelyn Partners, enthusiasm for the hyperscalers has repeatedly recovered despite previous volatility in 2022 and earlier this year. The latest rebound is particularly impressive because it has come despite sharply rising bond yields and the prolific amount of debt being issued to finance AI infrastructure.

Those worried about the sustainability of AI mania regularly draw parallels with the dot-com boom of the late 1990s, but the hyperscalers have deep pockets and are already making real money. Microsoft, Alphabet, and Amazon have all reported massive revenue jumps driven by cloud services and AI infrastructure, while Meta Platforms saw massive advertising boosts from its new Muse AI assistant and AI-optimised recommendation engines.

Despite these successes, risks remain. Yves Bonzon, group chief investment officer at Julius Baer, describes AI as a binary play where nobody really knows the final path or endgame, citing Elon Musk’s SpaceX and its heavy capital expenditures in AI. Meanwhile, a wider stock market sell-off driven by rising oil prices, inflation, and government debt has sent bond yields to multi-decade highs, causing investors to rotate out of equities and back into the US dollar as noted by Axel Rudolph, chief technical analyst at trading platform IG. As Dan Coatsworth, head of markets at AJ Bell, points out, rising bond yields mean equities must work harder to justify their volatility, making a durable trend towards greater diversification more important than ever.