Fairlead's Stockton flags rotation into 5 sectors as AI stocks slump

Capital rotating out of slumping AI stocks is building momentum in five nontech sectors, Fairlead Strategies said, pointing to healthcare, industrials, biotech, insurance and utilities.

"AI-related names have been under pressure, and we are seeing strong buying momentum emerge in sectors that have lagged the technology rally," Katie Stockton, founder and managing partner at Fairlead Strategies, said.

The five sectors Stockton identified span both defensive and cyclical areas. Healthcare, insurance and utilities are traditionally defensive, offering stable earnings and dividends during periods of tech weakness. Industrials and biotech are more growth-oriented, suggesting the rotation is not purely a risk-off trade, she said. Each group is showing improving technical momentum based on her firm's proprietary indicators.

The shift suggests investors are broadening exposure beyond the narrow AI trade that has dominated equity markets for much of the past year. If sustained, the rotation could support relative outperformance in value and defensive sectors while adding to selling pressure on technology stocks, which have driven the bulk of index-level gains.

Stockton made the comments in a July 10 interview with MarketWatch. Her analysis relies on technical indicators that track buying and selling momentum across sectors. She did not specify exact price targets or timeframes for the rotation but said the momentum signals are clear enough to warrant attention from portfolio managers.

The rotation thesis carries implications for ETF flows. Sector-specific funds tracking utilities, healthcare and industrials could see inflows as institutional and retail investors reposition, while technology-focused ETFs may face redemptions, according to the strategist.

The call comes as investors debate whether the AI trade has peaked after a multiyear rally that pushed technology sector valuations to elevated levels. While AI-related capital spending continues to grow — with major cloud providers committing billions to infrastructure — some market participants have questioned whether the stock prices of companies benefiting from the trend have become stretched relative to earnings.

Stockton's view aligns with a growing number of strategists who have urged investors to look beyond megacap technology names. The broadening of market leadership beyond a handful of stocks has been a recurring theme in 2026, with sectors such as financials and energy also attracting attention from rotation-minded investors.

Among the five sectors, healthcare has been a particular focus for rotation-minded investors given its defensive characteristics and exposure to demographic trends. The sector's large-cap pharmaceutical and managed care components offer dividend yields that compare favorably with technology stocks, making them attractive during periods of tech weakness.

Utilities have also gained attention as a rate-sensitive sector that benefits from stable cash flows and regulatory frameworks. The group has historically performed well when technology stocks decline, as investors seek reliable income streams.

Industrials represent a more cyclical bet within the rotation basket. The sector includes companies exposed to infrastructure spending, aerospace, and manufacturing — areas that could benefit from policy initiatives regardless of the technology cycle.

Biotech offers a growth angle within the nontech rotation, with the sector's innovation pipeline providing upside potential independent of the AI trade. Insurance stocks, meanwhile, combine defensive characteristics with rising premium growth trends.

For investors positioned heavily in technology, the rotation suggests a potential need to rebalance. The five sectors Stockton identified offer varying degrees of exposure to economic cycles, giving portfolio managers options depending on their outlook for growth and inflation.

The rotation out of AI stocks does not necessarily imply a bearish view on the technology sector, Stockton indicated. Rather, it reflects a tactical shift as momentum signals in nontech sectors improve relative to those in technology, creating opportunities for investors to diversify.

This article is for informational purposes only and does not constitute investment advice.