Published January 16, 2026
Thus far in 2026, we have seen a substantial rotation in the stock market. Investors have been moving out of the long-time leading Mag 7 stocks and into cyclical materials and industrials sectors. This comes as the immense AI data center spending announced by the Mag 7 companies turns to the actual building out of the facilities. The chart below shows how the performance of the Mag 7 stocks compares to the S&P 500. An upward trending line signals outperformance by the Mag 7. A downward trending line notes the Mag 7 underperforming the S&P 500 index. While the Mag 7 has barely budged in price since September, the S&P 500 has trended upward, thus outperforming. The chart suggests this outperformance by the S&P 500 may have reached a sort of momentum threshold to keep going, similar to what happened at the beginning of 2025.
The brief below from Barron’s adds some further detail to the conundrum facing AI investors, and the market more broadly.
“Market action suggests investors are falling out of love with the artificial-intelligence trade, but here’s the rub—earnings from Taiwan Semiconductor Manufacturing (TSMC) and industry surveys indicate spending on the technology is only set to grow. So someone is getting it wrong on AI.
Judging by the performance of tech stocks so far in 2026, this is the year when AI will run out of steam. Shares of chip leader Nvidia have drifted since last summer while Microsoft is at its lowest level in seven months. Things are even worse for pure-play software companies — players such as Salesforce, which has championed AI agents, are on the brink of multiyear lows.
On the other hand, TSMC—the dominant manufacturer of AI chips—is planning record capital expenditures, which it promises is justified by months of checks with major customers. And industry surveys of company executives say AI is the top IT budget priority with spending only set to increase.
How to reconcile these two narratives? One argument is that investors recognize AI spending will continue to increase, they just don’t believe it is money well spent. Bank of America strategists estimate borrowing in the tech sector could hit as much as $950 billion over three years. The growing number of circular financing deals and off-balance-sheet arrangements used to fund investment naturally attracts skepticism.
Investors have been fleeing anything AI-related in a rotation toward value stocks and small companies. But shareholders in some sectors such as utilities and data-center infrastructure shouldn’t particularly care whether the AI spending is sensible, only that it is set to last—and all the indications so far are that the boom has a long way to go.
A rebalancing of stock portfolios and a broadening of the market rally is healthy. But investors should be open to the possibility that some AI stocks are now on offer at bargain prices.”
Meanwhile, Leuthold Group issues the following caution regarding the shape of the AI trade:
“Coming into 2026, investors have been somewhat spoiled.
The S&P 500 last year pulled off a rare “threepeat” of 15%-plus returns in three straight years. The first was in 1995-97, while the second in 2019-21, plus the most recent one, means two such events for investors in the past seven years, the investment-management firm said.
What usually follows those periods is higher volatility warns Leuthold. They flag an even bigger “risky trinity” worry as they see three major market themes becoming increasingly intertwined.
“You’re going to have big corrections, even crashes in multiple interconnected asset classes, because they’re just exposed to the same underlying risk,” Chun Wang, senior analyst and co-portfolio manager for the Leuthold Global Fund, Leuthold Core Investment Fund, and the Leuthold Select Industries Fund, told MarketWatch in an interview on Tuesday.
Chun said the “biggest underappreciated risk in the market” right now is the “unprecedented convergence” of three long-running and winning themes for investors: AI, bitcoin and private credit.
Worries around AI data-center buildouts are a known factor, while second part of that trinity is private credit, which has been funding data-centers and other AI projects, in place of banks. “The growing exposure tightly links private credit performance to the AI infrastructure cycle,” Leuthold notes.
The third part is bitcoin, which has become “increasingly entangled” with AI and private credit. That’s as bitcoin mining firms in the past two years have repurposed big-scale data centers to host AI workloads, Leuthold said.
To fund this, many miners have borrowed from private credit markets, with bitcoin their most liquid collateral. That means a sharp fall in prices of the crypto could create credit events and force miners to sell more to shore up liquidity, potentially creating a downward spiral, said Leuthold.”
Market Update
Stocks overcame early weakness to close +0.2% higher Monday. The weakness came when the Trump Administration’s pressure to oust Fed Chair Powell ratcheted up a big level with the President’s Dept of Justice threatening to bring criminal charges against Powell. The President also tweeted support for an interest rate cap on credit cards. Those moves sent financial stocks lower Monday. But buyers came in to the broad market to push indexes positive as tech shares outperformed. Strength in semiconductors offset weakness in financial shares to leave stocks fractionally higher once again Tuesday. Bank earnings kicked off with record results. But rather cautious outlooks sent bank shares lower. A report on producer prices came in around projections matching the favorable consumer inflation report issued Tuesday. That news plus a better-than-expected retail sales report failed to support stock Wednesday. Negative responses to bank earnings continued sending the S&P 500 down -0.5% on the day. Semiconductor stocks hit a higher gear Thursday when manufacturer TSMC posted blistering earnings and raised its growth outlook. Investment firms Goldman Sachs and Morgan Stanley issued strong earnings reports sending their shares strongly higher. President Trump backed off threats to attack Iran which also helped investor sentiment. But all that positive news only sent the broad market higher by +0.3%. The relatively tepid move at the broad index level reflects the weakness in the market’s gargantuan “Mag 7” stocks. None of the Mag 7 stocks moved with the TSMC announcement as rotation out of the group remains heavy. Utility providers became the latest group to receive the attention of the Trump Administration’s flurry of potential policy thrusts to improve “affordability”. The Administration wants the big tech companies, not consumers, to shoulder the bulk of the utility cost hikes driven by data center demands on the electric grid. Another voice of caution regarding future interest rate cuts sent yields on U.S. Treasury notes sharply upward to their highest rate since last summer. Stocks were left little changed Friday.
A tale of two markets this week with the broad market indexes beholden to the performance of the Mag 7 stocks and treading water while equal-weight indexes continued pushing upward. The S&P 500 (SPY) dipped -0.35%. The Nasdaq 100 (QQQ) was lower by -0.86% despite huge strength in semiconductor shares. Reflecting the powerful buying elsewhere in the market, small caps (IWM) followed through on their breakout with a +2.13% rise this week.
Warm wishes and until next week.