The Stock Market Is In Mega Rotation
NEW YORK, NEW YORK – APRIL 01: Traders work on the floor of the New York Stock Exchange
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Stocks are at record highs and AI is still dominating the headlines, but there is a major rotation happening under the hood, suggesting this is more than just another AI rally.
Apollo chief economist Torsten Slok ran the numbers last week on market-cap growth in the S&P 500 since the start of 2026, broken down by AI, energy, and everything else.
No surprise, AI blows everything out of the water. Since the beginning of the year, AI stocks have added more than $6 trillion in market value, while the rest of the index has barely budged or lost value.
That looks like the classic AI concentration story. A few large companies dominate the index, passive money keeps flowing into the same winners, and the sum of all constituents looks healthier than the average stock underneath it.
But if you look beyond the cap-weighted S&P 500, the market is rotating into a different trade.
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The mega rotation
Here’s a quick rundown of the rotation:
- Small caps are outperforming large caps for the first time in years, with the Russell 2000 up 20.1% year-to-date as of June 18, compared with a 9.6% gain for the S&P 500;
- Value stocks are outperforming growth, with BlackRock’s iShares Russell 1000 Value ETF up about 15% year-to-date through June 17, compared with roughly 3% for the iShares Russell 1000 Growth ETF;
- International stocks, especially emerging markets and the Asian AI supply chain, are outperforming the U.S. BlackRock’s iShares MSCI ACWI ex U.S. ETF was up about 14.5% year-to-date through June 17;
- Cyclicals are beginning to outperform the S&P 500 this month;
- And the Magnificent 7 are no longer looking so magnificent. The group has been underperforming the broader market this year, with several of the biggest AI winners lagging the S&P 500.
What could explain this rotation
There are a few reasons behind this major rotation.
One is that investors are no longer betting only on a handful of headline AI stocks. They are diversifying down the supply chain and geographically. This is why Korean and Taiwanese stocks have been so hot this year.
Meanwhile, Europe and other international markets are closing the valuation gap and getting an extra boost in dollar terms because of the weaker dollar.
Second, and perhaps most important, the market is betting on the so-called “reflation trade,” which means inflation and growth both pick up, but not to the point where inflation chokes off the economy.
The biggest giveaway is the rise of cyclicals this month.
Cyclicals are among the biggest beneficiaries of reflation because they have the most operating leverage. When nominal revenue rises, their earnings can rise even faster because a big chunk of their cost base is already fixed.
With all that said, AI remains the single biggest failure point, even if investors are diversifying away from the hottest AI names.
Unlike the dot-com bubble, this emerging technology is no longer confined to the market. The real economy is increasingly leaning on AI investment, from chips and data centers to power equipment, grid upgrades and corporate capex.
If there is any unwinding in AI capex spending or even serious talk of capital discipline, this AI/reflation trade could fall apart like a house of cards.