US tech roared back, but is the great investment rotation already over?

Just one month ago, it seemed the era of US technology stocks might be nearing an end, as investors worried about an impending AI bubble. Experts were increasingly advising investors to reduce exposure, shifting towards banks, industrials, smaller companies and emerging markets. The trillions poured into AI infrastructure left many questioning whether hyperscalers like Alphabet, Amazon, Meta and Microsoft could ever see a return on investment.

The so-called Magnificent Seven and other tech hopefuls had enjoyed a prolonged run. This shift was dubbed the "great rotation." However, within weeks, investors began shifting back into technology, with renewed enthusiasm for AI sending the Nasdaq soaring toward new highs. Is this the start of another rotation? The great rotation may not be as significant as initially thought.

Investors have experienced this pattern before, with the bull run for big tech lasting over a dozen years, punctuated by volatility, notably in 2022 when valuations crashed. Hollands, managing director at Bestinvest by Evelyn Partners, notes that investor enthusiasm for hyperscalers has recovered each time, and it's now taken off again.

The latest rebound is particularly notable given the rise in bond yields, which typically negatively impact the discounted cash flow models used to value growth stocks. Despite higher yields, investor appetite for tech remains resilient, with impressive corporate profit margins. There's a stark contrast with the dot-com boom of the late 1990s – the hyperscalers now have deep pockets and generate real revenue.

Microsoft's Q2 revenue jumped 18% to $90 billion, while Alphabet's increased 24% to $119.8 billion, and Amazon climbed 20% to $200.6 billion. These cloud services and AI infrastructure growth drivers have bolstered earnings, outpacing share price increases. Meta Platforms experienced a staggering 28% revenue rise to $60.8 billion, driven by its AI-optimized recommendation and targeting engines.

Despite massive AI capital spending, hyperscaler valuations have become more appealing due to accelerating earnings growth. However, risks persist. The sheer uncertainty of this technological revolution is akin to a "binary play," according to Yves Bonzon, group chief investment officer at Julius Baer. While AI's disruptive potential is clear, the path to profitability remains uncertain, particularly for AI startups like SpaceX's AI division, which posted a $1.26 billion loss despite revenue soaring 247%.

This rapid progress in AI chip development could render current investments obsolete. Despite potential challenges, Hollands maintains that investors should not abandon tech. Despite the broader sell-off in October due to rising oil prices, inflation, government debt, and a surge in bond yields, tech stocks have remained resilient.

Banks, industrials, smaller companies, and emerging markets have also faced sell-offs, but the dollar's strength and investor confidence in tech persist.