Tech Rotation Accelerates as Investors Exit NVIDIA
NVIDIA drops 2% as sector rotation hits AI stocks hard. The Philadelphia Semiconductor Index falls roughly 2% amid broad profit-taking.
The AI trade is taking a breather.
NVIDIA fell 2.1% Thursday as investors rotated out of technology and into defense stocks. The Philadelphia Semiconductor Index dropped roughly 2%, and the Nasdaq Composite shed 0.44% even as the Dow climbed 270 points.
It's the kind of divergence that signals a leadership shift—at least in the short term.
The Numbers
Thursday's tech damage was widespread:
| Stock | Thursday | 5-Day |
|---|---|---|
| NVIDIA (NVDA) | -2.1% | -1.8% |
| AMD | -2.5% | -0.9% |
| Intel | -3.6% | +2.1% |
| Micron | -3.2% | +13% |
| Oracle | -1.9% | -0.5% |
| Palantir | -2.7% | -4.2% |
The tech-heavy Nasdaq settled at 23,480.02, while the S&P 500 finished essentially flat at 6,921.46. Information technology was the worst-performing sector, falling more than 1% on the day.
Meanwhile, industrials and defense names soared. Lockheed Martin gained 4.3%, Northrop Grumman added 2.4%, and the broader industrial sector posted solid gains.
Why Investors Are Rotating
Several factors are driving the shift away from tech:
Valuation Fatigue: NVIDIA still trades at roughly 35 times forward earnings after its $5 trillion market cap peak in October. The stock has lost about $460 billion in market value since then—still up enormously from 2022 levels, but no longer making new highs.
Smart Money Exits: Peter Thiel sold his entire NVIDIA position in Q3 2025. SoftBank dumped its $5.8 billion stake. Michael Burry has reportedly taken bearish positions against AI-related names. When high-profile investors head for the exits, others notice.
Competition Concerns: NVIDIA's biggest customers—Alphabet, Microsoft, Amazon, Meta—are all developing their own AI chips. AMD is gaining traction. The competitive moat that justified NVIDIA's premium isn't as clear as it was a year ago.
Sector Rotation Mechanics: With defense stocks rallying on Trump's $1.5 trillion budget proposal, traders are funding those positions by selling winners. Tech had the biggest gains; tech provides the source of funds.
The AI Spending Question
Beneath the price action lies a fundamental debate: Is AI spending sustainable at current levels, or are we approaching peak investment?
Goldman Sachs warned this week that "some of the tailwinds that drove huge growth in recent years are starting to fade." Hyperscaler capital expenditure—the spending by cloud giants on data centers and AI infrastructure—is expected to decelerate in 2026 after explosive growth in 2024-2025.
That doesn't mean AI spending is collapsing. But the second derivative is turning negative. Growing at 20% instead of 50% still means billions in revenue, but it changes the multiple investors should pay.
NVIDIA's CES 2026 keynote showcased the Rubin platform with 5x performance gains. The technology roadmap remains strong. The question is whether the stock's valuation already reflects that roadmap—and whether competition will erode margins before Rubin ships in volume.
Where the Money Is Going
Thursday's rotation wasn't just out of tech—it was into specific beneficiaries.
Defense led the way. L3Harris is now up 11% year-to-date, making it one of the top S&P 500 performers in the first week of trading. The sector offers a different growth narrative: government contracts instead of AI spending, geopolitical catalysts instead of enterprise adoption curves.
Consumer staples also attracted flows. Investors looking for lower-volatility exposure found it in names like Procter & Gamble and Coca-Cola, which posted modest gains Thursday.
Even traditional value plays caught bids. Banks have been quietly outperforming as higher-for-longer rate expectations support net interest margins.
Technical Damage
From a charting perspective, NVIDIA's Thursday decline put it back below the 50-day moving average for the first time since late November. The stock has struggled to reclaim its October highs, creating a potential lower-high pattern that technical traders watch closely.
Support sits around $125—roughly 10% below current levels—where the 200-day moving average provides a floor. A break below that would signal something more than routine profit-taking.
The semiconductor index (SOX) shows similar patterns. After rallying sharply into year-end, it's now testing the top of its recent range. A failed breakout could trigger mechanical selling from trend-following funds.
What Traders Are Watching
Options activity in NVIDIA showed elevated put volume Thursday, with particular interest in February expiration puts at $120 and $115 strikes. That doesn't mean traders are betting on collapse—it likely reflects hedging by long holders who want protection through earnings season.
NVIDIA reports Q4 earnings in late February. That's the next major catalyst. Until then, the stock may drift sideways as investors wait for data on Blackwell adoption and initial Rubin guidance.
The broader tech sector faces a similar holding pattern. Big tech earnings start flowing in late January, with Microsoft, Apple, Amazon, and Meta all reporting. Those results will determine whether Thursday's rotation was a one-day event or the start of something larger.
For now, the message from the market is clear: the record highs came from broad participation, not just AI. And when participation rotates, even the biggest winners feel the pressure.