It's not the AI bubble bursting, but escaping the crowd! Wall Street strategy shifts from "AI Computing Beta" to "Cash Flow Alpha"

According to Zhitong Finance APP, as South Korea’s stock market—which has recently been called the “AI computing power weathervane”—frequently triggers both upside and downside circuit breakers, the Philadelphia Semiconductor Index in the US stock market has plunged nearly 19% from its June high, on the verge of a technical bear market. Coupled with extremely crowded and highly leveraged long positions in global AI computing theme stocks and the semiconductor sector, this has together led to extreme and intense sell-offs. Top Wall Street strategist teams from Citigroup, Morgan Stanley, and others have shifted their strategic stance from "AI infrastructure beta" (i.e., AI computing power β) to high-quality, low-volatility, strong cash flow, and fundamentally robust cyclical or defensive stocks with strong fundamentals, which have not seen gains this year comparable to tech stocks and possess alpha potential.

Beata Manthey, head of European equity strategy at Citigroup, stated in a media interview on Friday that the bull market outlook for global equities remains optimistic over the next six months. However, as the market rally spills over from the AI-related tech sector, sharp rotations in equity holdings are becoming inevitable. Manthey’s view is nearly identical to those from Jefferies and Morgan Stanley—that as momentum trading in AI semiconductors and other AI computation themes cools, capital will move from high-leverage computing β stocks to lower-stress quality stocks. The market’s leading force is expected to shift from semiconductors to defensive assets with strong fundamentals and cash flow in the next alpha sectors, such as consumer, cyclical, medical, and large financials.

Jefferies points out that volatility around AI-related tech stocks will persist in the future, and it may be time for investors to rebalance portfolios that have become overly concentrated in highly valued AI tech stocks—in other words, while the AI main theme hasn’t gone cold, the bull market is starting to expand and rotate into non-AI technology sectors.

“Alpha” is defined as investment returns that substantially outperform "beta returns"—that is, returns that far exceed those from synchronized investments tracking benchmark equity indices. The returns from such synchronized investing are referred to as “beta returns.”

Yung-Yu Ma, chief investment strategist at PNC Asset Management, stated that PNC has shifted its stance on hot AI-related tech stocks from "overweight" to "neutral" due to the AI computation trading theme now being “fully priced in” at current levels. “Many investors may be heavily overweight technology stocks now. While their returns have been solid, we believe it's time to broaden horizons and look at other relatively lagging areas of the market,” he advised.

According to Morgan Stanley’s senior strategist Michael Wilson, the “AI bull market spillover” does not mean the end of the AI main theme; instead, corrections in popular AI tech names could trigger capital to rotate from crowded technological leaders to classic cyclical, consumer, medical, industrial, financial, and transport sectors with earnings recovery. This logic aligns with Yardeni's "earnings-driven melt-up" and JP Morgan’s upward revision of the S&P target: the super bull market is far from over, but the next phase may not be driven solely by AI tech; rather, a multi-engine rally is underway—“AI-driven productivity gains spill over to all sectors + upward earnings revision + broader market participation.”

As the global equity market enters a period of high volatility and rebalancing, Citi recommends investors shift from AI to the financial sector

Citigroup’s European strategy head Manthey explained in the interview that the current weakness in global technology equities reflects sector rotation rather than a market-wide collapse. For example, as US tech names like Micron and Western Digital—AI computation favorites—plummet, and the Philadelphia Semiconductor Index nearly falls into a bear market, the US benchmark S&P 500 remains on an upward trajectory.

Additionally, Manthey noted that despite ongoing negative news related to the AI investment boom, global equities were up 10% in the first half of this year, with major indices hitting record highs.

This Citi European equities strategy chief stated, “The market is already anticipating this long-awaited broad rally. To achieve that, a certain degree of sector rotation must occur—and sometimes that can be quite dramatic, which is precisely what we’re witnessing now.”

Manthey believes that European financial stocks, especially large European banks, are among the most attractive segments for investment amid sector rotation and rally broadening. She described Citi’s overweight position in European banking stocks as a “counter-AI style hedging trade,” emphasizing that regardless of overall market movements, these European banking giants have underlying reasons stemming from their own fundamentals to continue their bull market runs.

She added that putting aside extreme market volatility, the answer to whether investors should hold equities for the next 6 to 12 months is “very likely yes.”

This strategist outlined three reasons for a more bullish stance on the European equity market, especially the financial sector: upward earnings revisions for banking stocks are near historical highs, 80% of European sectors have received earnings upgrades, and analysts continue to raise their forecasts for European benchmark indices.

From the AI computation beta theme to the “buy cash-flow defensive and market breadth” strategy! Cyclical and defensive sectors poised to lead the summer rally

The latest fund manager survey by Bank of America (BofA) reveals that investors’ extreme optimism toward AI tech themes, equity bullish positioning and strong earnings expectations, and ongoing valuation expansion have severely overdrawn basic growth prospects for the next 1-2 years. This is reflected by a sharp drop in the average cash level among fund managers, from 4.1% to an extremely low 3.6%, and a bull-bear indicator reading 9.4 out of 10, a pessimistic score.

The BofA fund manager survey also shows that the global average net overweight in equities rose slightly from 38% last month to 42%. Some institutions are increasing exposure to long-term, low-volatility, high-quality, and stable cash-flow blue-chip stocks in underperforming sectors such as healthcare, industrials, and consumer discretionary, while cutting positions in energy, communications, consumer staples, and technology stocks.

Jefferies recommends investors hold high-quality, low-profit-taking-pressure, and low-crowding/high-cash-flow stocks to ride out any potential major summer tech correction, especially as volatility surges with crowded AI semiconductor trades unwinding, deleveraging shocks, and rising concerns over AI monetization. As the AI semiconductor theme corrects due to crowded positioning and high leverage, money is shifting from high-crowding AI computation beta to cash-flow defensive names—and the leading Wall Street strategy is increasingly broadening from AI infrastructure to a much wider set of quality fundamentally strong assets that have lagged technology.

In the Jefferies portfolio chart below (the following capital letters are stock tickers), ABBV and SYK are healthcare quality assets; PEP, PG, and MCD are defensive consumer cash-flow names; AXP, HD, and LOW lean toward consumer/cyclical recovery; SPGI is high-moat financial data/index services; and NFLX is a profitable media tech asset but not a direct part of the AI capex hardware chain. This strategy aligns with Morgan Stanley chief equity strategist Wilson’s view: to exit “high-crowding, high-leverage, high-momentum” AI computation trades, embrace broader market participation, especially in defensive themes like financials, healthcare, and low-valuation cyclicals like consumer discretionary, industrials, transportation, and regional banks.

This list highlights Jefferies’ latest focus on a “high quality, low stress, low momentum, cash-flow defensive” strategy. Amid rising debate over AI capital spending, escalating token costs, and discussion about potential overcapacity, the emphasis has shifted from concentrated exposure to high-beta AI computing chains towards assets with high earnings quality, good free cash flow yields, non-extreme valuations, and which haven’t been overly chased by momentum money.

Wilson’s latest rotation framework points in the same direction: market leadership should rotate from semiconductors and other direct AI capex beneficiaries towards large-scale cloud companies, consumer discretionary, transportation, regional banks, and biotechnology. Wilson’s Morgan Stanley team’s latest view emphasizes that US equity market breadth should continue to improve, with a preference for consumer discretionary, transportation, regional banks, while adding biotech to the rotation main line. The core of Morgan Stanley’s strategy isn’t “the AI super bull is over,” but that the valuations and positioning of AI capex beneficiaries have become overheated, and the market needs to broaden out from AI semiconductor momentum trading to earnings recovery, stable cash-flow, and more rationally valued cyclical and defensive sectors.