Technology stocks are no longer providing their traditional market support, but investors can take steps to protect their portfolios during periods of volatility.
For years, technology and artificial intelligence stocks drove market gains on expectations of productivity revolution, but they are now experiencing a downturn. It has been four months since the tech-heavy Nasdaq Composite Index hit its record high. The S&P 500 is largely flat for the year and may record its poorest monthly performance since March.
Meanwhile, stocks with lower exposure to AI are advancing. The blue-chip Dow Jones Industrial Average has climbed 3% this year, as it relies less on tech stocks compared to the Nasdaq and the S&P 500.
This shift is part of a broad market rotation on Wall Street following the cooling of the AI frenzy. Nvidia (NVDA), a star performer in the AI trade, suffered its worst single-day drop since April on Thursday, despite reporting strong quarterly results.
Concerns about AI disrupting business models continue to pressure software companies. The market is also uneasy about massive investments by tech giants in data centers, questioning whether these multibillion-dollar expenditures will yield returns.
However, analysts and portfolio managers suggest investors need not panic excessively at this stage, as the change in market leadership could present new opportunities.
Over the long term, the broader market tends to rise, with the S&P 500 showing solid average annual returns. This implies that long-term investors in index funds like the S&P 500 can generally afford to overlook short-term fluctuations.
Seeking Shelter
Nearly 40% of the S&P 500's market capitalization is concentrated in mega-cap tech stocks like Nvidia, Microsoft, and Google. Worried investors can reallocate their holdings toward sectors with less AI exposure.
"Investors may unknowingly be overexposed to technology stocks," said Jon Ulin, Managing Director at Ulin & Co Wealth Management.
Fragile sentiment toward tech has caused the S&P 500 to trade sideways. The index hit a record high in late January, retreated in February, and has been largely flat since late October.
Ulin emphasized the importance of not overreacting to market noise but reviewing one's portfolio during turbulent times. He is reducing allocation to large tech stocks and shifting funds into sectors like materials, energy, infrastructure, industrials, healthcare, and consumer staples.
Craig Johnson, Chief Market Strategist at investment bank Piper Sandler, downgraded technology stocks from "overweight" to "market weight" this week, effectively reducing their weight in his portfolio.
Johnson is optimistic about sectors like energy and expects the market rotation to continue as investors seek to avoid recent tech volatility.
Year-to-date, the top-performing sectors in the S&P 500 are energy, materials, and consumer staples, while technology and financials have lagged. A popular ETF tracking the energy sector is up 23% this year, whereas a tech-sector ETF has declined 2%.
Diversifying Portfolios
Analysts note it remains unclear whether the worst of the AI-related uncertainty has passed. How investors should respond depends on their savings and investment goals, but strategies exist to protect portfolios when market anxiety rises.
"Investors have become very nervous and fearful about the impact of AI," said Jed Ellerbrock, Portfolio Manager at Argent Capital Management. "The market is sensitive and volatile right now, with focus shifting extremely quickly. Therefore, building a highly diversified portfolio is a reasonable approach."
Another strategy is rebalancing or investing in an equal-weight S&P 500 index. This index assigns the same weight to each stock, mitigating the impact of a sharp decline in tech stocks. The S&P 500 Equal Weight Index has gained nearly 7% this year, significantly outperforming the less than 1% gain of the standard S&P 500.
Increasing exposure to international stocks can also enhance returns. European and Asian markets have continued to outperform the U.S. this year, following strong gains in 2025.
Analysts also suggest that sticking to a long-term plan and ignoring market noise can be an effective strategy during times of volatility and uncertainty.
"We recommend always employing diversification and not betting solely on a single investment theme," said John Strand, Wealth Manager and Research Analyst at Badgley Phelps.
"Predicting short-term market moves has always been difficult," Strand added. "While pessimism may persist, we still believe equities will achieve gains in 2026."
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