Markets rotated away from technology as investors favored health care, utilities, and real estate despite AI strength.
Sectors & Industries
June 29, 2026
Table of Contents
One of the biggest questions hanging over markets this quarter was whether the unprecedented wave of AI spending was finally beginning to slow. Micron largely put that debate to rest.
The memory chip manufacturer delivered one of the strongest earnings reports in semiconductor history, reporting revenue of $41.5 billion versus expectations of roughly $35.7 billion while raising next quarter's guidance to as much as $51 billion. Even more importantly, the company announced that it has already signed 16 multi-year Strategic Customer Agreements running through 2030, representing approximately $100 billion in contracted revenue with another $22 billion in customer deposits. These agreements effectively guarantee supply years in advance, highlighting just how severe the shortage of AI memory has become.
Perhaps the most important takeaway wasn't simply the earnings beat—it was what it revealed about the broader AI economy. Customers are no longer purchasing chips quarter-to-quarter. They are committing billions of dollars years in advance because they expect AI infrastructure demand to remain elevated for the foreseeable future.
Yet despite one of the strongest earnings reports the industry has ever seen, technology stocks broadly sold off following the release. That tells us investors have begun asking a different question: not whether AI spending will continue, but which companies will ultimately generate the greatest returns from that spending.
While Micron confirmed AI demand remains exceptionally strong, institutional investors spent the week reducing exposure to many of the companies that have led the market higher over the past two years.
According to Goldman Sachs' Prime Brokerage data, hedge funds sold technology stocks at the fastest pace in more than a decade, with semiconductor equipment, software, communications equipment, and the Magnificent Seven all seeing meaningful outflows. Technology funds also experienced their largest withdrawals in months, while capital rotated toward more defensive areas including consumer staples, energy, real estate, and select housing-related companies.
Importantly, this does not necessarily signal that investors have become bearish on AI. Instead, it suggests the market is becoming far more selective.
For nearly two years, almost every company connected to artificial intelligence benefited from the same narrative. Today, investors are beginning to distinguish between the companies collecting the checks and those writing them. Chip manufacturers, memory suppliers, networking companies, and other infrastructure providers continue benefiting from extraordinary demand and growing pricing power, while the hyperscalers investing hundreds of billions of dollars into AI infrastructure are facing increasing scrutiny over how quickly those investments will translate into meaningful shareholder returns.
Rather than abandoning technology altogether, Wall Street appears to be entering the next phase of the AI trade. Investors are no longer rewarding every company tied to artificial intelligence equally—they are increasingly favoring the businesses supplying the AI buildout while demanding clearer evidence that the companies funding it can generate attractive returns on those investments.
The week's economic data painted a surprisingly resilient picture of the U.S. economy despite continued inflationary pressures.
Consumer spending accelerated in May even as the Fed's preferred inflation measure climbed to its highest level in roughly three years.
Personal incomes also increased, while the University of Michigan'sconsumer sentiment survey improved from its recent lows as gasoline prices declined following the easing of tensions in the Middle East. Inflation expectations also moved lower, suggesting consumers believe the recent spike in prices may prove temporary rather than the beginning of another prolonged inflation cycle.
The picture, however, remains far from perfect.
Core inflation continues running well above the Federal Reserve's target, while the personal savings rate remains near multi-year lows as households continue drawing down savings to support spending. At the same time, consumer borrowing is accelerating.
Total consumer credit jumpedby $25 billion in March to a record $5.14 trillion, marking the largest monthly increase in a year. Credit card balances rose by $10 billion, the biggest monthly increase since early 2024, while auto and student loans climbed another $15 billion, pushing non-revolving credit to an all-time high of $3.80 trillion. Since the pandemic, total consumer credit has increased by more than $1 trillion, highlighting that many households are increasingly relying on debt to maintain spending as prices remain elevated.
Taken together, the data reinforces the idea that the U.S. economy remains stronger than many expected earlier this year. Consumers continue spending, businesses continue investing, and confidence is improving as energy prices retreat. However, that resilience is increasingly being supported by higher borrowing and lower savings rather than stronger purchasing power alone. Combined with persistent inflation, it leaves the Federal Reserve under pressure to keep monetary policy restrictive for longer, even as markets continue hoping for eventual rate cuts.
With the second half of the year about to begin, history offers an interesting perspective on where market leadership could shift next.
Since 2006, Health Care has been the best-performing sector during the second half of every U.S. midterm election year, posting an average gain of 8.5% while delivering a positive return 100% of the time. Industrials, Financials, Materials, Consumer Staples, and Utilities have also historically performed well during this period.
Perhaps the biggest surprise is Technology. Despite dominating market performance over much of the past decade, the sector ranks only eighth during the back half of midterm election years, producing an average gain of roughly 6% with a 60% success rate. Real Estate has historically been the weakest performer, posting negative returns in every observed midterm period.
History is never a guarantee of future performance, particularly during a market being reshaped by artificial intelligence. However, it does provide a useful framework for understanding the type of rotation institutional investors often pursue as election uncertainty increases.
That possibility appears increasingly relevant today. While AI demand remains exceptionally strong, recent hedge fund positioning suggests investors are beginning to broaden exposure beyond the handful of companies that have driven the market for the past two years. Health Care has already begun showing relative strength, with the Health Care Select Sector SPDR ETF (XLV) gaining roughly 9% over the past week. If that rotation continues, sectors with historically strong midterm performance—particularly Health Care, Industrials, and Financials—could become increasingly attractive areas to watch during the second half of 2026.
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