Old-Economy Rotation Accelerates as AI Darlings Falter: Is the Great Divide Just Beginning?

If you’re still clinging to your AI software winners from last year, you might want to check if your portfolio has quietly aged into a museum piece. The market’s latest act is a full-on rotation out of software and AI darlings into the kind of stocks your grandfather used to buy, think industrials, energy, and even Big Pharma. The narrative has flipped, and the smart money is moving before the headlines catch up. The question isn’t whether the rotation is real, but how far it can go, and what it means for traders who still believe tech is the only game in town.

The facts are stark. Benzinga reports that investors are fleeing software and AI-exposed stocks, with the sell-off accelerating in February as fresh fears about AI spending and margin compression take hold. The S&P 500 Equal Weight index just hit a new all-time high, but the tech-heavy XLK ETF is stuck in neutral at $141.06, refusing to budge. Meanwhile, Big Pharma is posting strong earnings, and old-economy stocks are quietly outperforming. The market’s wild week, as MarketWatch puts it, has rattled investor confidence and exposed a growing divide. One strategist summed it up: “It seems like there are two different markets right now.”

Let’s put this in historical context. The last time we saw a rotation this pronounced was during the post-pandemic reopening, when cyclicals briefly outshone tech. But that was a flash in the pan compared to what’s brewing now. The AI trade has gone from consensus to crowded to, frankly, exhausted. The hyperscalers are spending like it’s an existential crisis, $650 billion and counting, according to MarketWatch, but the market is no longer impressed. Instead, investors are rediscovering the virtues of cash flow, dividends, and pricing power. The result is a bifurcated market where the old rules suddenly apply again, and the new economy is on the defensive.

The analysis is clear: the rotation is not just a blip. It’s a structural shift driven by macro realities. Inflation is sticky, rates are higher for longer, and the easy money that fueled the AI boom is gone. The market is rewarding companies that can deliver real earnings in a tough environment, not just promise growth. The divergence between the S&P 500 Equal Weight and the tech sector is the canary in the coal mine. As AI spending spirals and margins get squeezed, the risk is that tech underperforms for longer than most traders expect. Meanwhile, the old-economy stocks are benefiting from a tailwind of rising demand, pricing power, and, in some cases, outright scarcity. The smart money is already there, and the retail crowd is just starting to catch on.

Strykr Watch

The technicals tell the story. XLK is stuck at $141.06, with no momentum to speak of. The ETF has failed to break above its 50-day moving average, and RSI is languishing in the mid-40s. Volume is drying up, and the path of least resistance is lower. Meanwhile, the S&P 500 Equal Weight index is making new highs, and the rotation into cyclicals and defensives is picking up steam. Watch for a break below $140 on XLK as confirmation that the rotation is accelerating. On the upside, a move above $143 would be needed to reverse the trend, but that looks unlikely given the current setup. For traders, the message is clear: don’t fight the tape. The momentum is with the old economy, and the tech trade is on life support.

The risks are not trivial. If tech earnings disappoint further, or if AI spending continues to spiral without a clear path to profitability, the sell-off could accelerate. A sudden reversal in rates or a dovish pivot from the Fed could spark a short-covering rally in tech, but that’s a low-probability event given the current macro backdrop. The bigger risk is that the rotation becomes a stampede, with money fleeing tech and crowding into a handful of old-economy winners. That’s a recipe for volatility, sector dispersion, and, potentially, a broader market correction if the rotation gets disorderly.

Opportunities abound for traders who are willing to embrace the new regime. Short XLK on a break below $140 with a stop at $142 offers a clean way to play the downside. Long S&P 500 Equal Weight or selected cyclicals and defensives can capture the upside of the rotation. For those looking for more juice, long volatility trades make sense as sector dispersion increases. Just remember: the easy money in tech is gone, and the market is rewarding discipline, not dreams.

Strykr Take

The great rotation isn’t a headline, it’s the new reality. The market is telling you, in no uncertain terms, that the AI trade is overcooked and the old economy is back in vogue. If you’re still betting on last year’s winners, you’re playing the wrong game. Adapt or get left behind. The divide is only going to grow, and the smart money is moving fast. Don’t be the last one out of tech when the music stops.