Are markets rethinking big tech?

By James Yardley on 3 February 2026 in US

Cracks have started to appear in the artificial intelligence trade. Markets had been nervously awaiting results from the mega-cap technology groups and the early signs are mixed. In particular, Microsoft’s AI spending has created renewed jitters on capex and kept markets subdued. It seems investors may finally be reappraising their view of the US.

Cracks have started to appear in the artificial intelligence trade. Markets had been nervously awaiting results from the mega-cap technology groups and the early signs are mixed. In particular, Microsoft’s AI spending has created renewed jitters on capex and kept markets subdued. It seems investors may finally be reappraising their view of the US.

In reality, the shift had already started in 2025. Of the Magnificent Seven technology companies, only Alphabet and Nvidia outperformed the S&P 500 over 2025*. There were already nerves about a potential bubble in AI. In particular, the realisation that the technology giants could no longer support spending out of cash flow, but instead needed to tap the bond markets, dented sentiment.

Hugh Grieves, manager of the Premier Miton US Opportunities fund said: “There had been a bit of a shock earlier in the year, when Deep Seek came out and it started to be clear that the winners weren’t just going to be American companies. Then Gemini was unveiled by Google, and people started to wonder if AI was just a commodity. It also started to become clear that companies couldn’t support all of this spending through cash flow. They were going to have to go to the bond market.”

The bond market may not be as generous as the equity market. After all, bond investors do not benefit from the upside if it goes right, but are exposed to the downside if it goes wrong. The cost of insuring technology company debt went higher. Hugh says:

He says that the most speculative AI companies may already have peaked. This happened in the Dotcom bubble, where speculative companies peaked in December 1999, months ahead of the more significant sell-off in markets. He believes there is now a “really interesting change in the dynamics of the market and scepticism on the AI trade.”

The team on Baillie Gifford American fund remain enthusiastic about the artificial intelligence trade, but believe investors need to pick the right areas within AI. Dave Bujnowski, investment manager, says the debate is becoming more nuanced, with two types of AI beneficiaries: companies tied directly to the spending cycle, the picks-and-shovels side of the buildout, and the ‘deployers’ – businesses using AI to become structurally stronger through improved operations, better products and faster decision-making.

He says: “The deployer’s story is more straightforward because it is already showing up in day-to-day execution. Even if AI spending slows, the tools are widely available and continue to improve quickly. That gives well-run teams room to keep iterating.” They point to groups such as Lemonade, Shopify and Guardant as examples. “This is why we believe the most interesting AI story often sits away from day-to-day capex commentary.”

Domestic strength?

At the same time, it has become clear that the US domestic economy may be stronger than initially thought, defying worries over tariffs, weaker spending, and higher inflation. Hugh says that in the information vacuum around the government shutdown, many economists had assumed the worst, but then the data was much better than expected.

Third quarter GDP data came in at 4.4%**, fuelled by strong consumer spending and a stronger trade balance. Interest rate cuts are still on the cards for the year ahead, and the tax cuts from the ‘One Big Beautiful Bill’ should start to filter through from the middle of the year. The shock of Liberation Day has started to fade and companies have been able to recalibrate their businesses around tariff levels.

Investors are already betting that this will create a better environment for the US’s smaller and mid-cap companies. Funds in the IA North American Smaller Companies sector have outpaced those in the North American sector by 3.4% over the past month alone***.

Bob Kaynor, manager of the Schroder US Mid Cap fund, says: “US small and mid-cap equities are likely to benefit from a potential market rotation, a view that is gaining traction with Wall Street strategists. After years of mega-cap dominance, investors are increasingly looking toward smaller, domestically-focused companies for growth and diversification. This shift is supported by a favourable macroeconomic backdrop, strong earnings momentum, and structural themes that play to small-cap strengths.”

It is about time. Many investors (including ourselves) had anticipated a rally in more domestically-focused companies as the Trump administration got underway. An agenda of high growth, low taxation and deregulation seemed likely to favour this part of the market. However, tariffs got in the way of sentiment and large caps outperformed again. Bob Says:

He points to a turnaround in this part of the market since the fourth quarter of 2025: “Better than expected earnings results for small and mid-caps were finally rewarded by the market. After a period dominated by lower-quality and high-beta, the market shifted back towards favouring higher quality names and valuation discipline.”

Hugh adds that quality has been “on sale”. He said: “Some of the highest quality businesses, with strong track records and wonderful market positions, great cash flow and balance sheets have been ignored by investors. The last time we saw quality companies do this poorly relative to the wider market was 1998-2000.” There was a strong run for quality after the technology bubble burst.

There are, of course, plenty of risks. Donald Trump is unpredictable, even if his wilder instincts appear to be tempered by markets. Hugh believes that the need to win the mid-term elections in November will curb his enthusiasm for imposing ever-greater tariffs and keep his priorities on supporting the domestic economy.

It seems more likely than not that the action in the US stock market could be away from the mega-cap technology groups, whether it is in other parts of the AI complex, or in small and mid-cap domestic companies remains to be seen. After a decade where investing in the US market looked easy, it may be about to become more complicated.

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