- The S&P 500 sell-down last week came on the back of portfolio rotation out of AI names as capex and concentration risks intensify; this shift was amplified by speculative retail positioning in leveraged products
- Rotations into healthcare, real estate, and consumer staples reflects a broadening of the AI themes
- US earnings momentum remains supportive, with forecasted earnings outpacing price gains amid strong capex trends
- Complement tech exposure with AI adapters in traditional sectors, companies that leverage on AI to improve efficiency and drive profitability growth
US sectoral rotational shifts in motion. The sell-down on S&P 500 last week probably came as a surprise given the downshift in energy prices and government bond yields which traditionally buoy risk assets. A dissection of the market performance suggests that major sectoral shifts are underway. At the index level, the US equities sell-down was driven predominantly by the rout in AI-related plays. Elevated retail participation in speculative instruments (such as leveraged ETFs) accentuated the magnitude of this.
However, the weakness was far from broad-based. Beyond technology, several traditional US industries actually ended the week higher. Gainers include healthcare (+7.9%), real estate (+4.0%), and utilities (+4.0%), which stood in stark contrast to communication services (-6.2%) and technology (-5.4%). This rotational shift reflects two key concerns:
- Rising capex: Market’s scrutiny over hyperscalers’ aggressive spending plans is increasing, with the four largest hyperscalers (Amazon, Microsoft, Alphabet, and Meta) guiding to c.USD725bn combined capex for 2026, nearly doubling 2025 levels. Furthermore, these tech companies are increasingly tapping on the debt market to fund massive capital commitments. For example, Meta recently issued USD25bn of bonds in May, marking its second jumbo debt issuance in just six months.
- Concentration risk: Currently, technology companies account for nine of the top 10 constituents, representing c.38% of the S&P 500. This concentration has materially diminished the diversification benefits of US equities, leaving investors with greater exposure to a single sector and less protection against technology-specific risks.
Such concerns are also evident in fund flow data. For the week ended 24 June, technology and communication services recorded net outflows of USD12bn and USD0.5bn, respectively, while healthcare and utilities attracted inflows of USD1bn and USD0.4bn. This suggests a portfolio rotation towards less crowded segments of the market.
Complement technology exposure with AI adapters. Forecasted earnings have been increasing at a faster pace than equity prices this year underpinning the resilience of US equities. Given the strong capex momentum in place, it is reasonable to assume that the robust earnings momentum will stay intact. However, the AI investment cycle is entering a more mature phase. Given current valuation and concentration levels, we recommend that investors ride the AI wave with AI “adapters” – traditional industries that embrace AI to improve efficiency and increase profitability. This provides a better risk-adjusted way to participate in the AI theme while reducing overall portfolio concentration risk.
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