Top executives running major investment funds warned that the long bull run for artificial-intelligence-linked stocks may be cooling, signaling a potential shift in how markets allocate capital. As AI-heavy indexes underperform, fund managers are recommending investors start rotating into sectors that previously took a back seat — such as industrials, energy and traditional value plays.
The warning comes after a year when AI stocks powered much of U.S. equity market growth. These companies drew record investor enthusiasm and soared in valuations, fueled by expectations of rapid adoption and a new tech era. But with macroeconomic uncertainty, rising interest rates and growing scrutiny over AI’s real-world profitability, the momentum behind the AI trade appears to be fading.
Executives at two leading exchange-traded fund (ETF) firms said that client demand has already started shifting. Rather than chasing the highest growth stories, many investors are seeking more stability and income potential. They are increasingly interested in sectors with tangible cash flows, reasonable valuations, and less volatility. This reflects a broader mood: markets may be entering a phase where fundamentals matter more than hype.
Several factors feed into that sentiment. Inflation remains stubborn, and interest rates stay elevated compared to the post-pandemic era. For growth-heavy sectors like AI, higher borrowing costs and tighter spending conditions challenge lofty future-earnings projections. At the same time, value sectors such as energy and industrials benefit from stable demand and offer dividends — features that matter in uncertain times.
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Beyond macro considerations, the shift also reflects AI’s recent performance. Many AI-related stocks have corrected significantly from their highs. With valuations still high relative to earnings, fund managers see limited upside. In contrast, value sectors now appear undervalued and attractively priced.
Some ETF firms are responding by launching “rotation” funds — collections of underappreciated stocks positioned to benefit from this change in sentiment. These funds appeal to investors who wish to reduce risk while maintaining growth potential. Executives say they expect increased flows into these ETFs over the next few quarters.
Analysts watching the move warn that this transition may not be smooth. If rates stay high or inflation spikes again, even value sectors could face headwinds. The performance of energy firms depends on oil prices, and industrial demand could suffer under a global economic slowdown. But many believe diversification remains a safer strategy than sticking with high-volatility tech stocks.
Investors may also face timing challenges. Markets that rotate too late risk missing rebounds in sectors that regain favor. Others may sell undervalued assets too quickly, sacrificing long-term gains. The key, some fund managers say, is a balanced approach — diversifying across sectors while staying alert to macroeconomic signals.
For now, the message from ETF leaders is clear: the AI euphoria that dominated recent years may be giving way. As institutional and retail investors alike reconsider their bets, the next big market wave may come not from algorithms, but from traditional industries and businesses offering reliable earnings — a return to old-school value with new eyes on opportunity.
