AI Spending Blowback: Why Wall Street Is Rotating Out of Tech and Into the Old Economy

If you blinked this week, you missed the moment when the AI trade went from 'can't lose' to 'can't breathe.' Wall Street, once hypnotized by the promise of infinite compute and bottomless cloud budgets, is now waking up with a hangover. The numbers are unforgiving: the so-called 'Big Four' hyperscalers are barreling ahead with a $650 billion AI spending spree, according to MarketWatch (2026-02-07), but the market’s patience is wearing thin. The S&P 500 sits at $6,930.26, flatlining as traders digest a rotation that’s less a gentle pivot and more a stampede for the exits. Software and AI-exposed stocks, the darlings of 2024 and 2025, have stumbled out of the gate this year, with the sell-off accelerating in February. The narrative has shifted from 'AI will eat the world' to 'AI is eating our margins.'

It’s not just anecdotal. The S&P 500 Equal Weight index hit a new all-time high, a clear signal that money is moving out of the megacap tech names and into the unloved corners of the market. Old-economy stocks, think pharma, industrials, and even utilities, are suddenly back in vogue, while software names are getting reacquainted with gravity. The market's divide is growing, and the confidence that once propped up tech is now propping up the Dow’s 50,000 milestone instead.

The AI trade’s unraveling comes at a time when the macro backdrop is anything but forgiving. Tariffs are starting to bite, with the full effects set to show up in the January CPI report, as SeekingAlpha notes. Inflation is sticky, and the Fed is still lurking in the background, ready to play spoiler if wage pressures flare up again. Meanwhile, Wall Street’s wild week has rattled investor confidence, highlighting a growing divide within markets. As one strategist told MarketWatch, 'It seems like there are two different markets right now.' That’s not just a cute soundbite. It’s the reality for traders navigating this regime shift.

The real story isn’t that AI is dead. It’s that the market is calling time on the 'growth at any price' party. The hyperscalers’ $650 billion capex binge might make for impressive headlines, but investors are asking uncomfortable questions about ROI. Alphabet, Amazon, Meta, Apple, Microsoft, Tesla, AMD, and Palantir all reported earnings this week, and the message was clear: growth is slowing, margins are under pressure, and the easy money has left the building. The result? A rotation so violent it’s leaving bruises.

Cross-asset flows confirm the trend. Commodities are flatlining, with the DBC ETF stuck at $24.01. Gold is boring, but that’s almost a virtue in this market. Even crypto, usually the canary in the coal mine for risk appetite, is licking its wounds after a brutal rout. The S&P 500’s stasis is masking a storm beneath the surface, with sector rotations and factor reversals happening at breakneck speed. If you’re still trading last year’s playbook, you’re already behind.

The historical parallels are obvious. Every cycle has its moment when the narrative breaks. In the late 1990s, it was the dot-com bubble’s 'eyeballs over earnings' mantra. In 2021, it was SPACs and meme stocks. Now, it’s AI’s turn in the penalty box. The difference this time is that the old-economy stocks aren’t just a defensive play, they’re actually delivering earnings growth, as Big Pharma’s Q4 results showed. The market is rewarding cash flow and punishing moonshots. That’s a regime change, not a blip.

Strykr Watch

Technically, the S&P 500 is stuck in a tight range around $6,930, with resistance at $7,000 and support at $6,850. The index’s RSI is hovering near 52, signaling a market that’s neither overbought nor oversold, but the underlying sector dispersion is where the action is. The equal-weighted S&P 500 is outperforming, a classic sign of rotation. Watch for breakdowns in the big tech names, if Microsoft or Alphabet lose their 50-day moving averages, the unwind could accelerate. On the flip side, industrials and healthcare are pushing multi-year highs, with pharma stocks breaking out above their 200-day MAs. Volume is picking up in these sectors, suggesting real institutional flows, not just retail FOMO.

The volatility index (VIX) is subdued, but don’t be fooled. Under the hood, single-stock volatility is spiking, especially in software and AI names. Options flow shows heavy put buying in tech, while call spreads are lighting up in old-economy sectors. This is a market that’s hedging its bets and preparing for more turbulence.

The risk? If the S&P 500 breaks below $6,850, the next stop is $6,700. But if the rotation continues, we could see a stealth rally in the laggards while tech continues to bleed. Keep an eye on breadth indicators, they’re telling the real story.

The bear case is simple: if AI spending fails to deliver, tech multiples have a long way to fall. The bull case? If inflation cools and the Fed stays sidelined, the rotation could broaden into a full-blown rally. But right now, the market is in 'show me' mode.

For traders, the opportunities are clear. Long old-economy stocks on dips, with stops below recent breakout levels. Fade tech rallies until the fundamentals improve. Watch for capitulation in software, when the last bull throws in the towel, that’s your signal to start nibbling. In the meantime, don’t fight the tape. The market is telling you what it wants.

Strykr Take

The AI trade isn’t dead, but it’s on life support. Wall Street is rotating out of tech and into the old economy, and the numbers back it up. This is a regime change, not a head fake. Respect the rotation, and don’t try to catch falling knives in software. There’s money to be made in the laggards, but only if you’re willing to let go of last year’s narrative. Strykr Pulse 52/100. Threat Level 3/5. Stay nimble, stay skeptical, and remember: in this market, cash flow is king.