Great Rotation or Pause in Tech Company Dominance?
Introduction
There has been a lot of attention paid lately to ag market shift where investors have been selling off high-growth technology shares—particularly the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla)—and reallocating capital to undervalued or defensive sectors. This has contributed to tech-heavy indices like the Nasdaq underperforming the broader market at times, with the Morningstar US Technology Index up 11.26% year-to-date as of August 11, 2025, while value-oriented areas have gained ground [1]. While it’s difficult to predict whether this trend will continue, we thought it would be useful to explain some of the potential reasons for this rotation and put it into a broader historical context.
Key Causes of the 2025 Rotation
- High Valuations and Profit-Taking: After outsized gains in 2023 (Up ~106% for the Magnificent Seven) and 2024 (up ~60%), tech stocks entered 2025 trading at premiums well above historical averages, making them vulnerable to corrections [2][3]. For instance, Nvidia and other Al darlings have seen scrutiny over massive capital expenditures with uncertain near-term returns.
- Macroeconomic Pressures: Persistent higher interest rates (e.g., 10-year Treasury yields around 4.3%) have hurt growth stocks, which rely on discounted future cash flows [4]. Reduced expectations for Federal Reserve rate cuts, combined with softening economic data (e.g., declining consumer sentiment and negative QI GDP forecasts), have amplified recession fears.
- AI Hype Cooling and Political Uncertainty: Doubts about Al’s immediate profitability have grown, with warnings of a potential “Al bubble” from figures like OpenAl’s CEO. Additionally, policy shifts under President Trump, including tariffs and deregulation, have introduced volatility, prompting shifts toward sectors less exposed to trade wars.
- Broadening Earnings Growth: Earnings expansion is spreading beyond tech, reducing the sector’s dominance. The gap between Magnificent Seven profits and the rest of the S&P 500 is narrowing, encouraging diversification.
Sectors Benefiting
Investors have rotated into:
- Value and Cyclical Sectors: Financials (S&P Financials Index up 28.9% in 2024), energy, industrials, and basic materials, which offer attractive valuations and benefit from potential deregulation or commodity strength [5].
- Defensive Sectors: Healthcare, consumer staples, and utilities, which provide stability amid economic uncertainty.
- International and Small-Caps: Non-US markets like Europe (financials, industrials), Japan, the UK, Germany, and even China have outperformed, driven by lower valuations and geopolitical factors (e.g., weakening US dollar). Small- and mid-cap value (e.g., Russell 1000 Value up 8.18% YTD as of August 21, 2025) has seen mixed but notable gains [6].
Duration Expectations
Some analysts view this as temporary profit-taking, similar to short-lived rotations in 2024 that lasted 1-6 weeks before tech rebounded on Al enthusiasm [7]. Others argue it couldpersist through 2025 or longer, supported by durable factors like valuation resets and broader market participation [8]. If rate cuts materialize or Al delivers tangible ROI, tech could regain leadership; otherwise, the shift may deepen.
What Might Make This Rotation Different from Past Ones
Historical rotations out of tech—such as the post-dot-com bust (2000-2003), the 2008 financial crisis shift, or the 2018-2019 value resurgence—often followed bubbles or recessions, leading to prolonged sector underperformance. The 2025 rotation shares some traits (e.g., overvaluation corrections) but stands out in several ways, making it potentially less severe but more geopolitically influenced. Below is a comparison table highlighting key differences, drawing from analyses of the dot-com era (the most frequently
cited parallel due to tech hype similarities) and other shifts:
| Aspect | 2025 Tech Rotation | Dot-Com Bust (2000-2003) & Other Historical Rotations |
|---|---|---|
| Economic Backdrop | Higher persistent interest rates (not seen consistently since pre2008) amid softening growth but no full recession yet. Focus on Al "digestion phase" where capex scrutiny is high but innovation is real [8]. | Dot-com followed low-rate fueled speculation and burst into recession. 2018 rotation occurred during rate hikes but with stronger global growth; 2022's was inflation-driven with rapid Fed tightening. |
| Market Breadth | Improved participation: ~46% Of S&P 500 stocks now outperform the index (vs. 27% in 2023), indicating healthier diversification. Rotation includes global elements (e.g., to Europe/-Japan) [10][1)]. | Narrow leadership in dot-com (tech ~30% of market but speculative); post-bust rotations saw sharp breadth collapses, with value outperforming for years amid low participation. |
| Triggers & Sentiment | AI enthusiasm waning due to bubble fears, but driven by tangible tech (e.g., GPUs, Cloud). Political factors like tariffs add unique volatility, potentially benefiting US cyclicals[12] | Dot-com was pure hype around unproven internet; no major political overlays. Other rotations (e.g., 2008) were credit/financial crises, not tech-specific innovation doubts. |
| Potential Severity | Could be milder due to profitable underpinnings, but some warn Al crash might exceed dot-com if losses if hype fully deflates (eg, more "suffering" from over-investment). Broader earnings support may sustain markets[13] | Dot-com saw Nasdaq drop 78%; prolonged pain. 2008 rotation let to 50%+ market drops, with tech lagging for years. |
| Investor Behaviour | Shift to defensives and internationals amid concentration risks (top 10 stocks ~34% of S&P). Passive flows amplify but fundamentals temper extremes. | Speculative retail frenzy in dot-com; institutional rotations post-2008 focused on safety (bonds/value) |
Summary
In summary, while past rotations often signaled multi-year tech winters amid economic downturns, the 2025 version appears more like a “rebalancing” driven by mature, profitable companies in a high-rate environment with geopolitical twists. This could limit downside compared to the speculative implosion of 2000, but Al’s unproven ROI remains a wildcard that could amplify losses if expectations crumble further [9][13].
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Disclosures
This commentary is provided for informational and educational purposes only. As such, the information contained herein is not intended and should not be construed as individualized advice or recommendation of any kind.
Any opinions and/or forward-looking statements expressed herein are not guarantees of any future performance, and actual results or developments may differ materially from those projected. The information provided herein is believed to be reliable, but we do not guarantee accuracy, timeliness, or completeness. It is provided “as is” without any express or implied
warranties.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results, and nothing herein should be interpreted as an indication of future performance. Indexes referenced are unmanaged and cannot be invested into directly.
Please consult your financial professional before making any investment or financial decisions.
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Footnotes
[1] Morningstar US Technology Index performance, August 11, 2025, Up 11.26% YTD. Morningstar, https://www.morningstar.com/indexes/morningstar-us-technology/quote
[2] Magnificent Seven returns, 2023, ~106% gain. YCharts, https://get.ycharts.com, March 20, 2025
[3] Magnificent Seven returns, 2024, ~60% gain. YCharts, https://get._ycharts.com, March 20, 2025
[4] 10-year Treasury yields, ~4.3%, 2025. Federal Reserve Bank of St. Louis, https://fred.stlouisfed-.org/series/DGS10
[5] Financials sector performance, 2024, ~28.9% gain. S&P Dow Jones Indices, https://www.spglobal.com/spdji/en/indices/equity/sp-500-financials-sector
[6] Russell 1000 Value performance, YTD as of August 21, 2025, ~8.18% gain. FTSE Russell, https://www.ftserussell.com/products/indices/russell-us
[7] Short-lived rotations in 2024, 1-6 weeks. Visual Capitalist, https://www.visualcapitalist.com, December 11, 2024
[8] Valuation resets and broader market participation, 2025. Morningstar, https://www.morningstar.com, July 15, 2025
[9] Tech giants’ market share, ~33% of S&P 500, 2025. The Motley Fool, https://www.fool.com, August 14, 2025
[10] S&P 500 stock outperformance, ~46% vs. 27% in 2023, 2025. LPL Research, https://www.lpl.com, November 18, 2024
[11] Global market rotation (Europe/Japan), 2025. Morningstar, https://www.morningstar.com, August 22, 2025
[12] Tariff-driven volatility, 2025. Oakmark Funds, https://oakmark.com, March 31, 2025
[13] Al crash potential, 2025. Charles Schwab, https://www.schwab.com, January 5, 2025
[14] Top 10 stocks’ market concentration, ~34% of S&P, 2025. The Motley Fool, https://www.fool.com,