Wall Street’s AI rotation sparks concerns over market exuberance

Wall Street’s early-summer pullback has been driven less by a broad market breakdown than by a sharp rotation away from the stock market’s AI darlings, according to Yardeni Research.

The firm said the S&P 500’s market-cap weighted index hit a record on 2 June before slipping 3.4% by Friday’s close, while the equal-weighted version was flat over the same period. That split suggests investors have not abandoned equities altogether; rather, they have rotated out of the largest technology names that powered much of the rally.

The pressure is being felt most acutely in the so-called Magnificent Seven, which Yardeni has recast as the “Lag-7”. The MAGS exchange-traded fund reached its own peak on 26 May and has since fallen 12.9%, leaving it down 6.6% for the year, even as the broader market’s “Impressive 493” have continued to advance. By contrast, the semiconductor-heavy SOXX fund pushed to a fresh high on 22 June, underlining how selective the shift has been within information technology.

At the centre of the reassessment is what Yardeni calls AI fatigue. Investors are increasingly questioning whether the hyperscalers’ vast spending on artificial intelligence infrastructure will generate adequate returns. S&P Global estimated in March that capital expenditure by Alphabet, Amazon and Microsoft could reach $495 billion in 2026, a 61% increase from 2025, even though analysts have yet to identify a clear line from that spending to durable earnings gains.

The concern is not only about scale, but about durability. Falling token prices are fuelling speculation that compute capacity may already be building faster than demand. The arrival of cheaper, powerful open-source large language models from China is adding to fears that current systems could be overtaken quickly, a dynamic often described as creative destruction. Reports have also suggested that Microsoft has been searching for lower-cost AI alternatives as it tries to rein in internal token usage.

That unease has come just as the market has been digesting a more conventional tech sell-off. The Associated Press reported that U.S. stocks fell on 23 June, led by major technology and AI-related names, with the S&P 500 down 1.4% and the Nasdaq falling 2.2%. Chipmaker Micron Technology was among the hardest hit, sliding 13.2%, while bond-market anxiety over inflation and interest rates also weighed on sentiment.

Yardeni said the broader earnings backdrop remains constructive, even if some of the exuberance may be getting stretched. S&P 500 forward earnings reached another record last week, although analysts trimmed their 2026 and 2027 forecasts slightly. Forward earnings for the S&P 400 and S&P 600 also hit fresh highs, suggesting that earnings momentum is broadening beyond the largest companies.

Still, the valuation and growth assumptions embedded in the technology complex are looking increasingly ambitious. Consensus long-term earnings growth for the S&P 500 information technology sector has climbed to a record, lifting the market-wide figure as well. Yardeni warned that such levels could point to irrational exuberance, particularly if analysts are assuming too much from AI-related profits and investment gains.

For now, sentiment is not yet at a level that would normally flash a contrarian sell signal, and Dow Theory remains supportive, with both the Dow Jones Industrial Average and the Dow Jones Transportation Average near recent highs. Transport indicators have also been improving, including truck tonnage and intermodal rail loadings, which points to an economy that is still expanding even as investors reassess the stock market’s most expensive theme.