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

Just one month ago, the US tech sector seemed to be facing a potential downfall as investors became wary of a possible AI bubble. Experts advised reducing exposure to mega-tech companies and focusing on banks, industrials, smaller businesses, and emerging markets. The increased investment in AI infrastructure raised doubts about whether these dominant players could generate returns on their investments.

The term "great rotation" was coined to describe the shift away from tech. However, investors quickly returned to technology stocks within weeks, driven by renewed enthusiasm for artificial intelligence. This isn't the first time investors have moved away from big tech; volatility has been a constant throughout the decade-long bull run, with valuations crashing in 2022.

Despite higher bond yields, which typically negatively impact growth stocks' discounted cash flow models, the rebound in tech stocks has been impressive. The latest surge is particularly notable because it occurred despite rising bond yields, and investors remain resilient. While AI mania parallels can be drawn to the dot-com boom of the late 1990s, the hyperscalers possess deep pockets and are already generating revenue.

Companies like Microsoft, Alphabet, and Amazon have reported significant revenue growth, with their valuations becoming more attractive as earnings continue to expand. However, investors should remain cautious as there are still risks involved, such as the potential for AI chips to become obsolete and the overall uncertainty surrounding the technological revolution.

Additionally, broader market concerns, such as rising oil prices, inflation, and government debt, have led to a general sell-off in equities, affecting not only technology stocks but also other sectors like banks, industrials, and emerging markets.