Investors Rotate Out of Tech, and the Fed’s Path Narrows

Investors are rotating out of mega-cap technology stocks, and the shift is starting to redraw the map of who is winning in U.S. equities. Joseph Tanious, chief investment strategist for North America at Northern Trust Asset Management, frames the move as healthy broadening rather than panic. The question is whether the rotation can hold together while inflation stays sticky and the Federal Reserve keeps rates on hold.

The numbers behind the rotation are stark. The S&P 500 Equal Weight Index posted its strongest start to a year against the cap-weighted index since 1992, according to Nationwide, and equal-weight benchmarks have led cap-weighted ones across several timeframes in 2026. At the same time, the information technology sector sits at 39.4% of the S&P 500’s market capitalization, a record above the dot-com peak. That gap between the narrow leaders and the broad field is what investors are now trading.

Leadership Is Broadening, Not Collapsing

Leadership in U.S. equities has narrowed for years, and a single trade has done most of the heavy lifting. A small group of mega-cap technology names has carried the S&P 500, while the rest of the index waited for its turn. That turn is starting to arrive.

On CNBC’s Closing Bell on May 27, 2026, Tanious said markets “need to broaden for [the] rally to have legs,” a message he had been making since at least February, when he told Power Lunch that “investors have a desire to diversify outside of large cap tech.” The S&P 500 Equal Weight Index, which gives every constituent the same 0.2% weight, outperformed the cap-weighted S&P 500 in early 2026 and on a 12-month basis, according to what the early-2026 equal-weight divergence signals. The shift means more companies across more sectors are participating in the move higher, a sign of healthier market breadth. Watch Tanious’s framing in Tanious’s May call for market broadening.

For investors, the practical effect is a market where gains are no longer the exclusive property of a handful of trillion-dollar stocks. The equal-weight trade carries its own risks, because smaller stocks tend to be more sensitive to economic swings, and the broadening can reverse if liquidity tightens.

The rotation in numbers

• S&P 500 Equal Weight Index posted its strongest start to a year against the cap-weighted index since 1992, per Nationwide
• Information technology sector share of S&P 500 market capitalization: 39.4%, a record above the dot-com peak
• Mega-cap tech plus AI-adjacent mega-caps combined: above 50% of S&P 500 market capitalization
• 2025 hyperscaler AI capital expenditure: roughly $400 billion
• 2026 hyperscaler AI capital expenditure estimate: $650 billion to $700 billion

Why Tech’s Grip Is Loosening

The pressure on mega-cap tech comes from two directions at once. Hyperscaler capital expenditure is still climbing, with Northern Trust estimating that 2026 spending on AI infrastructure will run between $650 billion to $700 billion, up from roughly $400 billion in 2025. The spending is keeping AI-related profits and balance sheets flush, and it is also making the index so top-heavy that a single trade now sits at 39.4% of the S&P 500’s market capitalization, above the March 2000 peak. For context on the infrastructure bill behind those numbers, see Amazon’s multibillion AI infrastructure push and Wall Street’s reaction.

Tanious has been blunt about the other side of the same trade, and the May 7, 2026 MarketScape note pointed to software as the place where that nuance showed up first. He wrote that the firm had expected investors to be “a bit more nuanced with where they want to allocate that capital” as 2026 progressed, and flagged AI fears as the main force driving software stocks lower. Tanious said the market’s worst-case conclusions went too far, a point reinforced in how software stocks sold off as AI fears spread.

We have seen absolute carnage in the software space, and the fear is that all of these advancements in artificial intelligence are going to completely displace the need for certain types of companies to exist. We think this fear is largely overblown, but of course there’s always some truth to it.

Joseph Tanious, chief investment strategist for North America at Northern Trust Asset Management, in the firm’s MarketScape note dated May 7, 2026.

CryptoBriefing, citing LSEG Datastream, reported that the information technology sector now sits at 39.4% of the S&P 500’s market capitalization, and that adding AI-adjacent mega-caps outside the technology classification pushes the combined share above 50%. As CryptoBriefing put it, passive S&P 500 exposure now amounts to a single bet on technology continuing to outperform.

Inflation’s Bite and the Consumer Trade-Off

The stock market and the consumer are running on different clocks in 2026. The Bureau of Labor Statistics reported on June 10, 2026, that the consumer price index for all urban consumers rose 0.5 percent on a seasonally adjusted basis in May. The 12-month change came in at 4.2 percent.

Inflation has eased from its peak in headline terms, but it is still sharp underneath the surface. Shelter rose 0.3 percent in May and 3.4 percent on a 12-month basis, keeping services inflation sticky. The all-items-less-food-and-energy index rose 0.2 percent for the month and 2.9 percent on the year, an improvement over the headline number but still above the Federal Reserve’s 2 percent target. For households, the practical reality is that rent, insurance, and services are not retreating quickly, even when the headline number cools. Tanious has made the same point from the buy side, writing in the May 7 MarketScape note that investors were going to have to be “a bit more nuanced” about where capital goes in 2026.

The consumer response is visible in the retail mix. Forbes reported on June 4, 2026, that off-price retailer Citi Trends posted double-digit sales growth and outlined a faster store expansion strategy.

Mid-tier retailers face more pressure than either discounters or premium brands. Travel and experiences continue to hold up, while big-ticket items tied to financing, such as cars and appliances, feel the drag of higher borrowing costs. The dispersion inside retail is part of why equal-weight indexes have outperformed, since a cap-weighted benchmark hides the gap between the value chains gaining share and the mid-tier names losing it. The widening between market confidence and household pressure is the setup that policymakers now have to navigate, with gasoline up 40.5 percent on the year underscoring how far the consumer side still has to run.

U.S. consumer prices, 12 months ending May 2026

The Fed’s Constrained Path

The Federal Reserve walked into the rotation with rates exactly where it left them in June. The FOMC voted 12-0 on June 17, 2026, to maintain the federal funds rate target range at 3-1/2 to 3-3/4 percent, holding policy steady for a meeting in which the central bank had to weigh a broadening equity market against a stubborn inflation print. The accompanying statement described economic activity as expanding “at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East,” and added that job gains have kept pace with the workforce while unemployment has changed little. The full text sits in the Fed’s June 17 FOMC statement.

The Fed’s inflation language was deliberately pointed. “Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy,” the statement said, language that points at least partly at the gasoline line in the May CPI. A Fed that framed energy as a supply shock has more room to wait through it than one that framed energy as the start of a broader reacceleration.

Markets are now testing what that patience is worth. With equal-weight stocks outperforming cap-weighted ones and the all-items index still well above the Fed’s 2 percent target, every CPI and jobs print will get closer attention than usual. Investors looking for a more risk-adjusted way to position through the next leg are increasingly sorting returns by volatility rather than just by direction, a shift covered in how risk-adjusted returns are driving portfolio shifts. The Fed’s next communication will be parsed as closely as the June statement itself, given how much now hinges on whether the median policy path shifts. A patient Fed plus broadening markets is the configuration Tanious framed as constructive on Closing Bell.

Where the Earnings Test Sits Now

The rotation has to clear one more hurdle to keep going. Markets can broaden on flows for a while, but flows cannot replace earnings for long, and the next test is whether the sectors drawing fresh money can post the kind of profits that justify the rotation. Northern Trust expects the AI trade inside technology to keep delivering for now, with Tanious noting in May that “we are expecting that trend to continue” through the rest of this year, a framework laid out in Tanious’s AI market outlook.

The earnings concentration underneath the index is the part that bears watching. CryptoBriefing, citing LSEG data, reported that the information technology sector now accounts for over 25% of the S&P 500’s trailing 12-month net income, nearly double its earnings share at the peak of the dot-com bubble. That is the share that has to defend itself if the rotation deepens. The same report, summarized at how tech concentration hit a record share of the S&P 500, flagged semiconductors as the standout inside technology. Micron is up 230% from the March 2026 low, with Intel and AMD each up over 160%.

For the rotation to extend, the earnings have to follow the flows into healthcare, industrials, financials, and the rest. Equal-weight benchmarks can keep outperforming through the reweighting alone, but durable leadership needs profit growth to back it up.

What earnings need to deliver next

• AI capex through hyperscalers, with 2026 deployment estimated at $650 billion to $700 billion, supporting data-center, semiconductor, and cloud revenue lines.
• Software margin defense, as incumbents integrate AI features and test whether they can charge a premium for enterprise-wide deployments.
• Equal-weight sector earnings, with healthcare, industrials, and financials margin trends the next test of broadening leadership.
• Information technology earnings share, sitting above 25% of trailing 12-month S&P 500 net income, the single largest earnings concentration in the index.

Frequently Asked Questions

Why are investors pulling money out of mega-cap tech?

Northern Trust’s chief investment strategist told CNBC’s Closing Bell on May 27, 2026, that markets need to broaden for the rally to keep its legs. Equal-weight indexes have outperformed cap-weighted peers through stretches of 2026, and the run is showing up in flows into healthcare, industrials, energy, and consumer staples. The shift reads as a search for the parts of the market that have not yet done the work.

How concentrated is the S&P 500 in tech right now?

CryptoBriefing, citing LSEG Datastream, reported on June 3, 2026, that the information technology sector sits at 39.4% of the S&P 500’s market capitalization, above the nearly 35% level from March 2000. Add in AI-adjacent mega-caps outside the technology classification and the combined share crosses 50%. That is the share held by a single thematic trade.

What is the Fed doing about inflation in 2026?

The Federal Reserve held the federal funds rate target range at 3-1/2 to 3-3/4 percent at its June 17, 2026 meeting, voting 12-0 to keep policy unchanged. The accompanying statement said “inflation remains elevated relative to the Committee’s 2 percent goal,” citing supply shocks including energy as a driver.

Are off-price retailers really winning from inflation?

Off-price chains are pulling in price-sensitive shoppers, yes. Forbes reported on June 4, 2026, that Citi Trends posted double-digit sales growth and is expanding stores faster than planned, a sign that value channels are picking up trade from squeezed households. Mid-tier retailers are getting squeezed in between discounters and premium brands.

What could break the rotation thesis?

A sharp rebound in mega-cap tech earnings, or a deeper-than-expected deterioration in the broad economy, would both put the rotation in question. FXCM’s review flagged that smaller and mid-cap leadership can reverse quickly if liquidity tightens, and CryptoBriefing warned that nearly 40% of the index in one sector leaves the broader market exposed if the leaders stumble.