MW These are the market's new hot stocks as investors flee from tech
By Isabel Wang
Investors are suddenly dumping technology stocks and rotating into other areas - including health insurers, banks and retailers
Investors are dumping tech - but they're not fleeing the stock market entirely.
Investors spent the last two years crowding into artificial-intelligence stocks as a hedge against an economic slowdown that never fully arrived.
Now, with the labor market showing promising signs, the rotation trade that violently gripped the stock market before the Iran war looks to be back on - just with a slightly updated look.
Investors on Friday dumped the Big Tech names that helped the S&P 500 SPX and Nasdaq Composite COMP embark on the record-setting rally that's taken much of the focus away from any fallout from the Iran war. Yet the surge in Treasury yields following Friday's strong jobs report for May appears to have shifted the narrative once again.
Not only have the odds of a Federal Reserve interest-rate hike been boosted, but questions have emerged about whether the U.S. central bank is already behind the curve. Higher rates would make financing the billions of dollars being spent on AI chips and infrastructure more expensive, and there's no guarantee such spending will translate into actual profits.
See: First Google, now Meta? Big Tech may increasingly sell stock to bankroll $820 billion AI boom.
Yet not every stock got hurt: Health insurers, banks and retailers did the heavy lifting that megacap tech names usually handle. It could be a sign that investors feel the AI trade has run too hot, too fast.
Investors are "taking profit in one group, but don't want to get out of the tape," said Mike O'Rourke, chief market strategist at Jones Trading. Instead, they "recycled and rotated" their money into other stock sectors, apparently favoring "recently oversold groups" such as financials and healthcare, he said.
That's why, in a week that saw the market-cap-weighted S&P 500 fall 2.6% and log its worst week in over a year, the equal-weighted version of the index XX:SP500EW was off just 0.5%. The S&P 500's healthcare sector XX:SP500.35 was one of the best performers among the S&P 500's 11 sectors last week, up 2.3%, while the financials sector XX:SP500.40 rose 1.3%. The real-estate XX:SP500.60 and consumer-staples XX:SP500.30 sectors popped 1.5% and 1%, respectively, during the same period, according to FactSet data.
Technology companies, caught in a "supercycle" of their own, don't necessarily reflect the broader economy, yet they emerged as a "safety trade" when the macro picture looked dire over the past year, said Shawn Severson, CEO and co-founder of Water Tower Research.
Many nontech names, however, "are truly much more economically dependent," he added, so a solid growth backdrop can be the tide that lifts all of those boats.
See: The Fed may already be too late in hiking interest rates - which is bad news for these borrowers
May's surprisingly robust jobs report on Friday sent the 10-year Treasury yield BX:TMUBMUSD10Y to 4.537%, its highest level in two weeks. The policy-sensitive 2-year Treasury rate BX:TMUBMUSD02Y surged 15 basis points to 4.16%, its highest level since February 2025, according to FactSet data.
Higher yields typically put downward pressure on tech stocks because the valuations of growth companies are heavily tied to future expected earnings, and rising interest rates can squeeze their profit margins.
"Technology had sucked so much of the oxygen out of the rest of the market," said Steve Sosnick, chief strategist at Interactive Brokers. "Alphabet $(GOOGL)$ $(GOOG)$ basically told you this week that it was cheaper for them to raise money by selling stocks than by going to the debt markets.
"If all this money needs to be raised at the same time that interest rates are going in the wrong direction, that does raise the risk for the technology valuations, which have gone to extremes," he said.
To be sure, May's strong jobs report should underpin economic optimism. But recent labor-market data may be telling an incomplete story, where headline numbers - such as nonfarm payrolls and the unemployment rate - look better than the health of the consumer.
U.S. consumers' purchasing power is shrinking. Average hourly earnings for all employees on private nonfarm payrolls in May were up 3.4% on an annual basis - but the most recent inflation data showed consumer prices in April were up 3.8% versus a year ago, according to the Bureau of Labor Statistics.
"It's very clear that wages are not keeping up with inflation, which explains why the consumer sentiment was at an all-time low," said George Catrambone, head of fixed income, Americas, at DWS Asset Management.
"The market is much more concerned about inflation than growth at this juncture, but investors really ought to be pricing much more in the negative growth and consumption effects," he told MarketWatch via phone on Friday. "I don't believe that the Fed is in a position to hike this year when nominal wage growth is still a bit below the current target federal-funds rate of 3.5% to 3.75%."
That makes this week's consumer-price index and producer-price index reports for May the next big test for markets. "All eyes will be on continued inflation metrics, and we should just be realistic since those numbers are going to remain elevated as long as the war is ongoing," Catrambone said.
In his view, the current inflation problem is being driven mainly by an energy supply shock brought on by the U.S.-Iran war - rather than by excessive consumer demand - so "a rate hike by the Fed would not effectively bring down inflation," Catrambone said.
Tomi Kilgore contributed.
-Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 07, 2026 12:00 ET (16:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments