A Market Split by AI
The split is easy to understand at the top. Semiconductor manufacturers, hardware providers, power-related companies and other AI infrastructure businesses are benefiting from enormous capital spending. In many cases, demand is strong, earnings growth is compelling and valuations still look reasonable relative to growth. We think investors should continue to consider selective exposure to these beneficiaries.
But a narrow market can also distort the signal investors receive from index returns. When a handful of companies dominate performance, many financially sound businesses may lag—or even decline—simply because they aren’t tied directly to the most powerful market narrative.
Lessons from the Dot-com Era
The AI divide has echoes of the late 1990s, when internet companies surged and blue-chip stocks were punished on fears that the digital economy would undermine the old economy. Some of those fears proved right: Amazon disrupted retail, Netflix disrupted entertainment, and Alphabet (Google) and Meta (Facebook) reshaped media. But the disruption narrative went too far. Eventually, many would-be disrupters stumbled, while established businesses used the internet to expand and improve margins.
Fast forward to today. The AI stars are enjoying explosive growth projections and some beneficiaries offer attractive long-term return potential. Yet, in our view, AI enthusiasm leaves little margin for error and investors should be alert to vulnerable business models.
Weakness Isn’t Always a Warning
So why are so many stocks breaking down simultaneously? In some cases, investors may be discounting disruption risk. For example, legacy software companies and some digital businesses may face real pressure if AI changes pricing power or reduces the value of existing products. But plenty of companies marked down today don’t appear to face obvious AI disruption. In some cases, earnings growth is simply too slow compared with the AI winners. When the market’s most visible companies are delivering explosive growth, even steady businesses can look dull.
That creates opportunity for fundamental investors. As we see it, the market may be overlooking companies with durable business models, solid balance sheets, improving earnings trajectories and reasonable valuations. These businesses can be found in areas such as financials, healthcare and industrials, where many companies appear less exposed to AI-driven disruption than headline performance would suggest.
The key is to separate true impairment from temporary neglect. A low-growth business with weak competitive positioning may deserve a lower valuation. But a high-quality company that’s selling off mainly because it’s not part of the AI trade may offer a more attractive entry point, in our view.
AI Benefits May Spread More Widely
Investors should also remember another lesson from the internet era: the benefits of transformative technologies often spread far beyond the companies that build the infrastructure. AI enablers may remain important winners. But the key question is: will productivity gains from AI accrue across a broader set of industries?
Over time, we expect AI to help many companies enhance efficiency, improve decision-making and expand profit margins. Some of those gains may be competed away in sectors with little pricing power, making AI disinflationary in parts of the economy. But businesses with strong competitive moats, pricing discipline and capable management teams may be better positioned to retain a meaningful share of the benefits.
Could Negative Beta Become a Cushion?
There’s another reason to look closely at stocks that have moved against the market. If the S&P 500 were to correct after several years of strong gains, we believe crowded positioning in leading AI names could unwind quickly. In that environment, a negative of a negative could become a positive. In other words, some negative-beta stocks might not merely decline less; they could potentially rise as investors rotate toward neglected businesses with attractive valuations.
Of course, that outcome isn’t guaranteed, and we don’t think targeting negative-beta stocks is a prudent investing strategy. But it does underscore an important point: market risk isn’t always where index-level performance suggests it is.
Look Past the Leaders
The AI boom is real and shouldn’t be ignored. But we believe active investors should look beyond the index leaders for companies with credible earnings growth, strong balance sheets, attractive valuations and limited disruption risk.
A market with more stocks moving against the index may look unsettled. At the same time, it can also point investors toward businesses overshadowed by the current AI infrastructure trade. If AI benefits broaden and fundamentals reassert themselves, today’s overlooked stocks could become an important source of future returns.
