Investors Grow Weary of AI Hype, Shift Cash from Mag 7 Stocks to Alternative Assets

Wall Street's love affair with artificial intelligence is hitting a wall. The once-unstoppable 'Magnificent Seven' tech stocks are seeing capital flee as investors ditch overhyped narratives for tangible returns elsewhere.

The Great Rotation Begins

Portfolio managers aren't just trimming positions—they're executing full-scale pivots. Money is flowing out of mega-cap tech and into sectors that promise real-world utility and clearer regulatory pathways. The search is on for assets with fundamentals, not just futuristic slide decks.

Where the Smart Money is Heading

Forget waiting for the next AI-powered earnings beat. Capital is finding a home in infrastructure, commodities, and—increasingly—digital asset frameworks that solve actual problems. Think decentralized finance protocols streamlining cross-border payments, not another chatbot claiming to revolutionize customer service.

A Dose of Cynical Reality

Let's be honest: the finance world reinvents the 'next big thing' cycle every few years to justify fees and drive commissions. AI had a good run, but the smart play is always spotting the bubble before it pops and moving to where value is being built, not just speculated on.

The message is clear. The era of buying the AI hype is over. The era of buying what works has begun.

Market rotation picks up steam

If the trend continues, it could end an unusual period when a few stocks drove the market. Since ChatGPT’s launch in 2022, Nvidia, Microsoft, and Apple added trillions in value, with Alphabet, Meta, Broadcom, and Oracle also benefiting from the AI boom.

The shift started after the S&P 500 topped out in late October, then dropped in November. It’s been gradual. Bloomberg tracks the Magnificent Seven as a group, and those stocks are down 2% since October 29 through Monday’s close. The other 493 companies in the S&P 500 went up 1.8% in that same time.

Money’s been flowing out of the hot momentum stocks into sectors that are more defensive and don’t cost as much.

There’s this fund called the Defiance Large Cap Ex-Magnificent Seven ETF that launched at the end of 2024. It pulled in fresh money for six months straight to close out the year. December’s inflows were actually four times what came in during November. The fund trades as XMAG and returned 15% last year. Most of that happened in the last six months.

Yardeni said the S&P 493’s performance in 2025 was “impressive.” Profit margins for this group stayed high and avoided pressure despite political changes, new tariffs under President Trump, and signs of a weakening job market.

If the economy gets better, cyclical sectors and growth-oriented ones will benefit. That creates opportunities for investors who want to move past Big Tech’s dominance. Banks like JPMorgan Chase & Co. and Bank of America Corp. should gain. Consumer companies WOULD benefit when shoppers feel confident enough to buy Nike Inc. sneakers or book vacations using Booking Holdings Inc.

History suggests bumpy road ahead

There are risks though. History shows that when a small group of dominant stocks loses control, the market usually gets bumpy.

Doug Peta, chief US investment strategist at BCA Research, said, “The most benign outcome for the bull market would be a peaceful transfer of power to a broad coalition of the other 493 S&P 500 constituents.” But then he added, “That’s not how potent and highly concentrated bull markets typically evolve, however.”

Peta still thinks AI has more room to run despite concerns that companies are spending too much on it and valuations have gotten stretched. But AI investors are being pickier now. It used to be that any company connected to AI went up. That’s splintered. Former darlings like Oracle have taken steep losses.

“It is not my view that the end of the Magnificent Seven’s reign is at hand – I will be surprised if they don’t make a final surge higher to cap their run – but once it does arrive, it’s most likely that new leadership will not emerge until US equities suffer a meaningful bear market,” Peta said.

Yardeni is more negative on AI stocks. He thinks the fatigue started with a cryptic warning from Michael Burry in late October. Burry’s the money manager who got famous. He followed up by revealing he’d made bearish bets on Nvidia and Palantir Technologies Inc.

Some warn Big Tech’s rally is slowing. Goldman Sachs expects the Magnificent Seven to drive 46% of S&P 500 earnings growth in 2026, down from 50% in 2025, as the rest of the index gains momentum.

The S&P 493 looks attractive to value investors too. Goldman Sachs strategists led by Ben Snider see wide gaps between valuations and fundamentals. Combined with a decent economic outlook, that’s good for value stocks.

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