Remember when AI was going to power the next phase of this bull market? When record capital spending made perfect sense because algorithms were about to reshape everything? That narrative is getting stress-tested right now, and the results aren't pretty for software stocks.
Veteran strategist Ed Yardeni dropped a vivid metaphor in his weekend note: AI is "speed skating on ice." The technology is moving so fast it's disrupting itself before investors can figure out who the winners are. Hardware becomes obsolete in months. Large language models leapfrog each other at warp speed. And investors who thought they understood the landscape are discovering they might be holding tomorrow's has-beens.
The result? A rotation that's reshaping market leadership in real time.
Software Gets Smoked
The iShares Expanded Tech-Software ETF (IGV) tells the story in one brutal number: down nearly 25% year-to-date. That's not a correction—that's a rethink. Investors are looking at traditional software business models and wondering how fast AI cannibalizes them versus how fast these companies can adapt.
Here's the interesting part: this isn't blind panic selling. There's actual discrimination happening. Last week saw selective buying of beaten-down names that could benefit from AI rather than get steamrolled by it. But the broader trend is unmistakable—software is under serious pressure.
Where the Money Is Going
If you're expecting investors to run for cash, you'd be wrong. This is a rotation, not a retreat. Money is leaving parts of the S&P 500 tied to uncertain AI outcomes and flowing into sectors rooted in the physical economy—the stuff you can touch.
Six sectors are catching bids: Energy, Materials, Consumer Staples, Industrials, Real Estate, and Health Care. These are the unsexy parts of the market that suddenly look predictable compared to trying to handicap which AI model wins three months from now.
"There has been a significant rotation in the stock market away from sectors representing less certain bets on the virtual world back to those representing the more predictable physical world," Yardeni explained.
The numbers back it up. Year-to-date, the Invesco S&P 500 Equal Weight ETF (RSP) has beaten the cap-weighted SPDR S&P 500 ETF Trust (SPY) by 5 percentage points. That gap reflects one thing: the Magnificent 7 are getting demolished relative to the other 493 stocks in the index.
What This Means for the Bull Market
Normally, bull markets concentrate into fewer names before they peak, then broaden out after corrections. Yardeni thinks this cycle might flip the script. He's betting the bull market continues, but with leadership spreading beyond mega-cap tech rather than narrowing into it.
That's an optimistic read of what's happening—essentially arguing that market broadening is healthy rotation rather than the beginning of something uglier. Whether he's right depends on whether AI fears are overblown or prescient. Right now, software investors are voting with their feet, and they're walking toward things that look boring but stable.
The AI trade isn't dead, but it's definitely wobbling. And for the first time in a while, the old economy doesn't look so old after all.
