Great rotation signals the start of some tough investment choices

After two years of Al mania, investors are rethinking which companies will actually profit from the technology

- Natale Labia

For much of the past two years, one beguiling idea has propelled financial markets ever higher. Artificial intelligence (AI), investors told themselves, would unleash productivity gains so spectacular that it could justify almost any valuation. From cloud computing giants like Oracle to obscure software installers, anything with a tenuous connection to large language models rode a wave of irrational exuberance.

Capital has flooded in, and investor skepticism has been almost nonexistent. Commercial viability has been regarded as a detail that will be sorted out in due course. Profits, it has been assumed, would inevitably be forthcoming once the vast infrastructure was in place.

This assumption is now being sorely tested. The turbulence that has roiled markets in recent weeks has been widely cast as a correction of speculative excesses. Yet this interpretation misses a more fundamental dynamic.

What has unfolded is not merely a selloff but a rotation, a reassessment of which technologies merit investment and which do not. Investors are not rejecting AI wholesale, but they are repricing who, ultimately, will actually benefit from it.

The S&P 500 is pretty much flat year to date. This hardly suggests panic. But as the old Wall Street maxim goes, there is no such thing as a stock market, only a market of stocks.

Beneath the placid surface the picture is far more dramatic. Technology-heavy indices such as the Nasdaq have fallen further. Some other favoured sectors, such as software, are suffering double-digit losses. A market that had until recently treated all AI-related stocks as profit machines is exercising greater discrimination.

AI is not just a one-way bet

Several forces have converged to trigger this shift. The first is AI's gradual commercialisation. The technology has not actually disappointed. Rather ironically, in some areas it seems to be working too well.