There are signs that five “interesting rotations” could be taking place in markets, according to Saxo’s Charu Chanana, and investors need to be aware of the opportunities and risks that each one presents to portfolios.
Chanana, chief investment strategist at Saxo, argued that resilient AI demand is no longer enough to satisfy investors, who are now demanding evidence that the spending behind it converts into monetisation, margins and cash flow.
This changing dynamic could be seen in the market reaction to the results of tech giant Meta and Tesla last week, she said.
Meta's revenue grew 26% last week, driven by advertising. Ad impressions rose 10% and average ad prices climbed 14%, evidence that AI is already generating returns in its existing business. However, Meta shares still fell around 7% after the company raised its 2026 capital expenditure outlook to $135-145bn and quarterly free cash flow turned negative.
Tesla faced the opposite problems. Free cash flow beat expectations and the company trimmed its planned 2026 capital expenditure, yet shares fell as investors questioned whether lower spending would slow progress in autonomous driving and robotics.
“Meta gets punished for spending more, while Tesla gets punished for spending less,” Chanana said. “It sounds contradictory, but the underlying message is consistent: investors want spending to match credible returns.”
Headline indices barely moved last week – the S&P 500 fell 0.5%, the Nasdaq Composite dropped 0.7%, the Russell 2000 gained 2.0% and the Dow Jones rose 0.4% - but beneath this Chanana identified five rotations that investors should watch closely.
Semiconductors to software and cybersecurity
Software and cybersecurity funds outpaced chip stocks last week. IGV, the software ETF, gained nearly 6% and HACK, tracking cybersecurity, rallied roughly 9%, while the semiconductor ETF SOXX fell around 3%.
“This does not mean the AI infrastructure boom is over. Demand for computing power and memory remains strong. But the market is increasingly questioning whether the largest infrastructure investments can deliver equally large returns,” Chanana said.
Therefore, the trade’s next opportunity could be in companies that help businesses actually use AI. Microsoft, Salesforce and ServiceNow could gain as companies lean on AI to automate routine work and cut costs, while Palo Alto Networks, CrowdStrike and Fortinet stand to benefit as businesses move to defend both their systems and increasingly autonomous AI tools.
“For investors, the focus should be on companies demonstrating real customer adoption, recurring revenue and stronger margins, rather than simply announcing new AI products,” the strategist added.
That trade carries risk, she noted. Software shares are not cheap and AI itself could upend some software business models, while strong cloud earnings could just as easily revive momentum in semiconductor stocks.
Mega-cap technology to healthcare, energy and defensives
Energy companies climbed last week on the back of elevated oil prices, biotechnology added nearly 3% and healthcare stocks rose around 1.5%.
“For investors, the opportunity is to reduce dependence on a small group of mega-cap technology names and follow changes in market leadership,” Chanana said.
Healthcare names AbbVie, Eli Lilly and Johnson & Johnson offer exposure to demand that holds up reasonably well through the cycle plus longer-run trends such as an ageing population, while elevated oil prices work in favour of Exxon Mobil and Chevron. Consumer staples and utility stocks suit any investor looking for more predictable demand and cash flows.
Chanana added that some investors may prefer the diversified exposure offered by sector ETFs, rather than single-stock allocations.
However, none of these sectors is immune to a broad downturn, and a wider slowdown in growth would weigh on earnings across the group. Meanwhile, energy returns stay tightly bound to the oil price, the Saxo strategist added.
Mega-cap concentration to small-caps
Smaller companies had a notably stronger week than their larger peers, with the Russell 2000 gaining around 2% against a 0.5% loss for the S&P 500 and a 0.7% fall for the Nasdaq.
This part of the market gives access to domestically focused companies that the AI rally has largely passed by. Chanana suggested investors access small-caps through broad ETFs that provide diversified exposure, noting that some products have a profitability requirement for index inclusion to improve quality within smaller companies.
“Small-caps are generally more sensitive to borrowing costs, credit conditions and domestic economic growth,” she said.
“With Treasury yields still elevated and the Fed maintaining a tightening bias, a sustained rally will need support from earnings and financial conditions, not just a temporary move away from technology.”
Capital gains to dividend income
Well-run dividend payers have looked “relatively unexciting” while tech stocks have been soaring higher, although Saxo argued that income investing starts to look more attractive when markets turn volatile.
Chanana said investors could consider dividend growers such as Procter & Gamble, Coca-Cola and Johnson & Johnson, well-capitalised financial firms, utilities and REITs, and dividend-focused ETFs.
“The important distinction is between a high dividend yield and a sustainable dividend,” she added. “Companies with strong free cash flow, manageable debt and the ability to grow distributions may be better positioned than those offering high yields because their share prices have fallen.”
However, she pointed out that payouts are not guaranteed, dividend equities still carry price risk and, with government bonds now paying competitive yields, equity income has to offer enough extra reward to justify that added risk.
Expensive growth stocks to bonds
Longer-dated treasuries rallied as the tech sell-off pushed investors toward safer assets, while the 10-year US treasury yield dropped around 10 basis points to end the week close to 5%.
“That is an important reminder of the different roles bonds can play in a portfolio,” Chanana said.
Bonds serve three purposes in a portfolio: income (current treasury yields mean investors can generate meaningful income through fixed income), resilience (investors tend to buy government bonds in volatile equity markets) and potential capital gains (if yields continue declining).
However, Chanana warned that the risks of this rotation are inflation remaining elevated. “If the Fed signals further tightening or inflation expectations increase, Treasury yields could rise again, pressuring bond prices,” she said.