Recent declines in technology stocks, particularly those linked to artificial intelligence, are prompting investors to re-evaluate their strategies. While major indices show only modest dips, a closer look reveals significant pressure on AI-centric companies, signaling a potential shift away from the market's most concentrated bets.
This cooling-off period is causing financial experts to suggest that now may be the time for investors to broaden their horizons beyond the high-flying tech sector. Analysts are pointing towards undervalued domestic sectors and international markets as potential areas for growth as concerns about high valuations in the U.S. tech market grow.
Key Takeaways
- Technology and AI-related stocks are experiencing a notable pullback, with speculative names seeing double-digit declines.
- Market experts are raising concerns about high valuations, particularly among mega-cap technology companies.
- Analysts suggest diversifying portfolios by considering equal-weighted S&P 500 funds, which reduce concentration in Big Tech.
- Opportunities may exist in less-hyped domestic sectors like industrials and healthcare, as well as in international markets with more attractive valuations.
A Deeper Look at the Market Downturn
On the surface, the overall stock market appears stable. The Dow Jones Industrial Average and the S&P 500 have seen minor declines of just 0.7% and 0.9% this week, respectively. The tech-heavy Nasdaq Composite has also fallen by a seemingly modest 1%.
However, these headline numbers mask more significant weakness within the technology sector that has driven much of the market's recent gains. The concentration of performance in a few large companies has propped up the major indices, but individual stocks tell a different story.
Tracking the Tech Decline
The Roundhill Magnificent Seven ETF (ticker: MAGS), which tracks the largest tech firms, has dropped approximately 1.5%. Companies like Amazon, Alphabet, and Meta Platforms have been particularly affected by the recent selling pressure.
The downturn is even more pronounced among more speculative companies associated with the AI boom. For example, Oklo, a nuclear energy firm that is not projected to be profitable in the near future, has seen its stock fall by more than 10% this week. Similarly, Oracle, which recently enjoyed a surge after an AI-related partnership, has declined by 5%. Memory-chip manufacturer Micron Technology has also fallen by 4%.
Valuation Concerns Come to the Forefront
The recent pullback highlights a growing unease among market participants about the high price of technology stocks. Katy Kaminski, chief research strategist at AlphaSimplex, described the current environment as challenging for investors.
“It’s a tricky time for stocks. There is definitely a concern about hype.”
This concern is rooted in valuation metrics. The U.S. stock market is heavily weighted towards a small number of mega-cap technology firms. To gain a different perspective, some analysts suggest looking at alternative index structures. Edison Byzyka, chief investment officer at Credent Wealth Management, recommends the equal-weighted S&P 500.
An equal-weighted index gives the same importance to every company, unlike the standard market-cap-weighted index where giants like Apple and Microsoft have an outsized influence. This approach offers a clearer view of the broader market's health.
Comparing Valuations
The Invesco S&P 500 Equal Weight ETF (ticker: RSP) currently trades at about 16.5 times its 2026 profit forecasts. In contrast, the standard S&P 500, dominated by high-priced tech stocks, trades at a much higher multiple of 22 times its 2026 forecasts.
Byzyka emphasized the need for a forward-looking approach. “With valuations for megacaps this high, investors need to ask where they want to be over the next 12 months,” he stated. He identified industrials and healthcare stocks as sectors that currently appear more attractive from a valuation standpoint.
Diversification Beyond Big Tech
While artificial intelligence has been a dominant theme, its influence extends beyond the well-known technology giants. The AI narrative has helped boost stocks in various other sectors throughout the year.
For instance, industrial companies like Amphenol and Vertiv have rallied, as have utilities such as Constellation Energy and Vistra. Even energy infrastructure firms like Williams have benefited from the broader economic optimism linked to technological advancements. This demonstrates that growth opportunities are not confined to a single sector.
Looking for Value in International Markets
Another strategy gaining traction is to look for opportunities outside the United States. Ron Albahary, chief investment officer at wealth-management firm LNW, expressed caution about the current state of the U.S. market.
“You have to question if this bull market is getting extended. An American bias has worked for the past few years, but non-U.S. stocks have been doing well for the past few months or so.”
Albahary attributes the recent strength in international stocks to two main factors: a weakening U.S. dollar, which increases returns for American investors holding foreign assets, and more compelling valuations abroad. “You want to see that rotation,” he added, referring to capital moving from overvalued to undervalued markets.
Katy Kaminski of AlphaSimplex shares this view, specifically highlighting markets in Europe, Australasia, and the Far East (EAFE). She noted that international stocks are “interesting for the first time in a long time” because their earnings growth is beginning to accelerate.
Furthermore, these markets remain relatively inexpensive. The iShares MSCI EAFE exchange-traded fund, a popular vehicle for investing in developed international markets, trades for less than 15 times its 2026 earnings estimates, offering a significant discount compared to the U.S. market.
As the market digests the recent AI-driven rally, the current pullback serves as a reminder of the importance of diversification. Investors are now waking up to the reality that long-term portfolio health may depend on seeking value beyond the most popular and crowded trades.
