Beyond AI: 5 market rotations to watch

Key points:

• AI spending is becoming a double-edged sword: Meta was punished for spending more, while Tesla fell despite cutting its investment plans.
• The rotation is broadening: Software and cybersecurity outperformed semiconductors, while small caps, healthcare and energy offered alternatives to mega-cap technology.
• Income deserves another look: Bonds rallied as Treasury yields fell, while quality dividend stocks offer investors another source of portfolio returns.

A quiet week for indices, but a big shift underneath

I'm back from a week away, and catching up on the markets, one thing stands out: AI demand remains strong, but Wall Street is losing patience with the cost of delivering it.

Last week's earnings from Meta and Tesla captured this contradiction particularly well.

Meta reported impressive revenue growth of 26%, supported by a strong advertising business. Ad impressions increased 10%, while average ad prices rose 14%, showing that AI is already helping the company generate more revenue from its existing business.

But Meta shares fell around 7%. Why? Because the company raised its 2026 capital spending outlook to $135–145 billion, while quarterly free cash flow turned negative.

Investors can see the benefits of AI in Meta's advertising business today. What is harder to value is the enormous investment in new AI models and infrastructure, where future returns are still uncertain.

Tesla faced almost the opposite problem.

Its free cash flow surprised positively, and the company reduced its planned 2026 capital expenditure. Yet shares still fell, as investors questioned whether lower spending could slow progress in autonomous driving, robotics and other AI ambitions.

Meta gets punished for spending more, while Tesla gets punished for spending less.

It sounds contradictory, but the underlying message is consistent: investors want spending to match credible returns. They are no longer rewarding bigger AI ambitions without asking tougher questions about cash flow, profitability and execution.

The broader market also showed signs of change. The Nasdaq slipped around 0.7% last week, but the Russell 2000 gained almost 2%. Beneath the headline indices, some sectors performed significantly better than the technology leaders that have dominated market returns.

Last week at a glance: Where did the money move?

Weekly performance | 19–23 October 2026 | USD

Sources: Bloomberg, Saxo

For investors, this creates five rotations worth watching:

1. From semiconductors to software and cybersecurity

One of last week's most striking moves came within technology itself.

The semiconductor ETF SOXX fell around 3%, while software ETF IGV gained nearly 6% and cybersecurity ETF HACK rallied roughly 9%.

This does not mean the AI infrastructure boom is over. Demand for computing power and memory remains strong. But the market is increasingly questioning whether the largest infrastructure investments can deliver equally large returns.

The next opportunity may be in companies that help businesses actually use AI.

Software companies such as Microsoft, Salesforce and ServiceNow could benefit as businesses use AI to automate everyday tasks, improve productivity and reduce costs. Cybersecurity companies such as Palo Alto Networks, CrowdStrike and Fortinet may benefit from the growing need to protect digital infrastructure and increasingly autonomous AI systems.

For investors, the focus should be on companies demonstrating real customer adoption, recurring revenue and stronger margins, rather than simply announcing new AI products.

For traders, the relative performance of software ETFs such as IGV against semiconductor ETFs such as SOXX could provide clues about whether this rotation is gaining momentum.

The risk: Software valuations can also be expensive, and AI could disrupt some existing software business models. Strong earnings from major cloud companies could quickly revive semiconductor momentum.

2. From mega-cap technology to healthcare, energy and defensives

Last week's market performance also showed that weakness in big technology stocks does not necessarily mean weakness everywhere.

Healthcare stocks gained around 1.5%, biotechnology rose nearly 3%, and energy advanced as oil prices remained elevated.

These sectors provide different drivers of earnings and returns.

Healthcare companies such as Johnson & Johnson, AbbVie and Eli Lilly offer exposure to relatively resilient demand, medical innovation and longer-term trends such as ageing populations. Healthcare ETF XLV provides broader sector exposure.

Energy companies such as Exxon Mobil and Chevron may benefit from elevated oil prices, although higher energy costs can also increase inflation pressures and weigh on economic growth.

Consumer staples and utilities offer another route for investors seeking more predictable demand and cash flows. ETFs such as XLP and XLU provide diversified exposure.

For investors, the opportunity is to reduce dependence on a small group of mega-cap technology names and follow changes in market leadership.

The risk: Defensive sectors are not immune to falling markets, while energy performance remains closely linked to oil prices. A broader economic slowdown could also affect earnings.

3. From mega-cap concentration to small caps

Another interesting shift last week was the outperformance of smaller companies. The Russell 2000 gained around 2%, even as the S&P 500 fell 0.5% and the Nasdaq declined 0.7%.

This suggests investors may be looking beyond the mega-cap technology stocks that have dominated market returns.

Small caps offer exposure to a broader range of domestically focused businesses, many of which have been overlooked during the AI-led rally. They could benefit if economic growth remains resilient and market leadership continues to broaden.

For investors, ETFs such as IWM (Russell 2000) and IJR (S&P SmallCap 600) provide diversified exposure. The latter has a profitability requirement for index inclusion, which may appeal to investors looking for greater quality within smaller companies.

The relative performance of IWM against SPY is worth monitoring. Sustained small-cap outperformance could signal that the market rotation is becoming more established.

The risk: Small caps are generally more sensitive to borrowing costs, credit conditions and domestic economic growth. With Treasury yields still elevated and the Fed maintaining a tightening bias, a sustained rally will need support from earnings and financial conditions, not just a temporary move away from technology.

4. From capital gains to dividend income

When technology stocks are rising sharply, dividends can seem relatively unexciting. But when valuations become harder to justify and share prices turn volatile, income starts looking more attractive.

Quality dividend-paying stocks offer returns that are not entirely dependent on rising share prices.

Investors could explore dividend growers such as Procter & Gamble, Coca-Cola and Johnson & Johnson, financial companies with strong balance sheets, and selected utilities or REITs.

Dividend-focused ETFs such as SCHD, VIG and DGRO provide diversified approaches to the theme.

The important distinction is between a high dividend yield and a sustainable dividend. Companies with strong free cash flow, manageable debt and the ability to grow distributions may be better positioned than those offering high yields because their share prices have fallen.

The risk: Dividends can be reduced, and dividend-paying equities still carry capital risk. With government bonds offering competitive yields, equity income must compensate investors for taking additional risk.

5. From expensive growth stocks to bonds

Bonds were another interesting part of last week's market action.

The US 10-year Treasury yield fell by around 10 basis points to finish the week near 5%, while longer-duration Treasury bonds rallied as investors sought safety during the technology selloff.

That is an important reminder of the different roles bonds can play in a portfolio.

First, they offer income. With Treasury yields still close to 5%, investors can generate meaningful income without relying entirely on equity-market gains.

Second, they offer potential diversification. Government bonds can benefit when equities fall because investors become concerned about growth or valuations.

Third, they can offer capital gains if yields continue declining, particularly for longer-duration bonds.

For investors, shorter- and intermediate-duration US Treasuries can offer income with less sensitivity to changes in interest rates than longer-duration bonds. ETFs such as SGOV and IEF provide examples, while TLT offers greater exposure to long-term yield movements.

The risk: Inflation remains elevated, and oil prices have risen. If the Fed signals further tightening or inflation expectations increase, Treasury yields could rise again, pressuring bond prices.

What could change the picture this week?

The next few days could determine whether last week's market rotations have more room to run.

Microsoft and Alphabet report earnings on Wednesday, followed by Amazon on Thursday. Investors will be watching cloud growth, AI spending, margins and free cash flow to determine whether these companies can justify their enormous infrastructure commitments.

The Federal Reserve also announces its policy decision on Wednesday. Rates are expected to remain unchanged, but investors will focus on whether policymakers signal another potential increase as inflation risks persist.

The bottom line

Coming back from a week away, the biggest change I see is not that investors have lost faith in AI. It is that the market is demanding even more evidence of returns and showing greater willingness to explore opportunities elsewhere.

This creates a broader investing landscape.

Semiconductors remain an important part of the AI story, but software and cybersecurity could capture greater attention as adoption grows. Healthcare and energy offer different earnings drivers. Dividend-paying stocks and bonds provide alternative sources of income and potential diversification.

The AI trade may not be over. But the market is reminding us that there is more than one way to make money.