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Beneath a flat S&P 500, markets are rotating sharply out of AI leaders (down 20% from June highs) and into AI-threatened stocks (up 46% from June lows); despite mounting risks, we believe AI is still early in its development, but volatility makes diversification essential.
What caught our eyes this week
Renewed headwinds for the AI trade
The S&P 500 has been treading water, but a peek under the surface reveals meaningful rotation. The AI leaders that have been powering much of the current bull market have turned to laggards. In fact, by some measures, AI is in its own bear market, with Goldman Sachs’ basket of broad AI beneficiaries down 20% from its June peak. But at the same time, stocks perceived to be threatened by AI—severe laggards through June—have bounced hard, up 46% from the June lows according to Goldman Sachs’ AI “at-risk” basket. The wall of worry for AI is steepening, thanks to higher rates, crowded positioning, lofty expectations, and a looming midterm election that will have implications for AI at all three levels: national, state, and local. Despite the risks, we still believe the proliferation of AI and its benefits is still in the early stages. That said, no one should expect a smooth ride. High volatility is often the cost of participating in burgeoning technologies, which makes proper diversification all the more important considering the high AI concentration in broad market indexes.
CHART OF THE WEEK: Cerity Partners, Goldman Sachs, Bloomberg, 1/1/2026–10/16/2026
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