Provided by Dow Jones. Originally Posted
By Brett Ewing
After the AI correction, megacap tech stocks are becoming more realistically valued – and still offer solid growth
Investors have been nervous about an AI correction for months. By all appearances, that correction has now arrived. Megacap tech stocks took a hit in February – the “Magnificent Seven” slid almost 7%. Yet, despite those seven stocks reflecting almost 40% of the S&P 500 SPX, the benchmark index was basically flat for the month.
For attentive investors, the situation may be puzzling. Was the adjustment underanticipated or overanticipated? What happens next? How can I protect my equity and how can I capitalize? The best way to answer these questions is to follow the capital.
Here’s the full story of where investors’ money has been going these past two years, where it’s going now and what this means for those who seek opportunity in a shifting market.
What happened?
The issue is not an overvalued market or even an overvalued industry, but a select few highly overvalued stocks.
Investment into AI-focussed large-cap tech was narrative-based for the better part of two years. The narrative suggested an arms race was under way, and capital flowed freely into the Magnificent Seven poster stocks with the assumption that profits would await those with the financial power to stay ahead.
In the latter half of 2025, this immense concentration of capital led investors to start questioning the fundamentals for the first time. Talks of so-called circular financing raised concerns about real adoption rates and short-term profitability. Investors started paying less attention to the story of AI and more attention to the hard metrics these companies were reporting quarter to quarter.
That brought the correction we are seeing now. It is not a dismissal of AI, which is a truly revolutionary technology backed by massive demand. It is merely the unbridled flow of capital into a handful of giant companies being checked.
That distinction also explains why the S&P 500 remains flat. The issue was not an overvalued market or even an overvalued industry, but a select few highly overvalued stocks. The broader market, in turn, has been undervalued for a long time. What we are seeing isn’t a market collapse – as some may have feared – but a natural restoration of balance.
What happens now?
A bit of seesawing is likely in the short term. February’s sharp adjustment may see a moderate reversal as nerves begin to settle. In the long term, the megacap tech stocks will be more realistically valued and more sensitive to quarterly statements than they have been in the past. Many of them could still have a positive year if adoption rates continue to climb, but the days of constant and unconditional investment are now behind them.
Much more interesting to investors than the inevitable correction, however, is the other 493 stocks in the S&P 500 that have collectively absorbed it. Capital that was once earmarked for large-cap tech stocks is already being diverted into a market that is far stronger than it has been given credit for. I foresee this trend will only gain steam as U.S. interest rate cuts, foreign investment, deregulation and GDP growth breathe new life into sectors that have been undervalued or even stymied in recent years.
Industrials and utilities – which are currently profiting from the physical infrastructure that AI demands – are already outperforming broader indexes, as are small- and midcap companies trading at historically low prices. Housing-related equities are also performing well and could see years of pent-up demand realized if financing conditions improve as substantially as I expect them to this year.
The market has not abandoned AI – and neither should investors. But they should diversify their portfolios to reflect higher risk in large-cap tech and more potential in sectors of the market positioned to receive outflowing capital. A healthy economy receiving an overdue correction does not predict a crisis for the active investor; it predicts a year full of opportunity.
Brett Ewing is chief market strategist at First Franklin Financial Services.
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Provided by Dow Jones. Originally Posted