Does The Nice Rotation Turn Nasty?
What we’ve been seeing playout in the S&P as it has hovered around this 6,800 – 7,000 level since October is a nice rotation where capital is reallocating from overweighted tech, tech-adjacent (not semi’s), and predominantly U.S. stocks to underweighted cyclicals and non-U.S. stocks. So far, this has been a ‘nice rotation’ where the S&P 500 has held near its highs while software, Mag7, and private credit undergo a nasty sell-off, while energy, staples, metals, and foreign equities march higher. However, it does have me wondering whether we are nearing a point where this ‘nice rotation’ shifts to a ‘nasty rotation’ that takes everything down. In particular, the S&P 500, which had given the appearance that everything was fine up until now.
It’s getting difficult to ignore the trillions of dollars in market cap that have evaporated in the software (IGV) and crypto space (BTC), both of which are 40-50% off their highs and each of which falls under the ‘AI disruption’ narrative. This level of wealth destruction will have ripple effects that make their way out into the economy and financial system.
However, as difficult as it's been for investors in the AI crosshairs, it's been equally rewarding in other areas. Below is a chart of various asset classes I monitor on a relative basis as an ongoing evaluation of the debasement trade – real assets vs. financial assets. This chart measures the year-to-date performance as of about 10:30am this morning, which shows the ‘nice rotation’ and/or debasement trade continues to work.
Here we have metals, miners, commodities, emerging markets, and foreign equities all up double digits while the S&P 500 meanders around the flatline for 2026. This trend has been underway since Trump was elected to a second term in November 2024. Below is the same chart going back to the end of 2024 through today, in which the message is the same.
This has been a welcome backdrop for investors willing and brave enough to branch out beyond the U.S. exceptionalism trade led by Mega-Cap Tech, which has worked so well over the past 15 years. But, as I started this missive off with, what I’m paying most attention to is if this rotation stays in the ‘nice’ bucket, because a shift to the ‘nasty’ bucket would mean that everything starts to trade down – some assets just decline less on a relative basis.
Speaking of Mega-Cap Tech and AI, I must admit that my own uncertainty and confusion level is running high. None of us know what AI can and will be 1 year, 3 years, 5 years, or 10 years from now. What we do know is that the horse is out of the barn and this is going to run its course – good, bad, or indifferent. I’ve read research and watched interviews suggesting it will “eliminate 50% of entry-level-white collar jobs” (CEO of Anthropic Dario Amodei), “white collar jobs face significant automation pressure in as little as 18 months” (CEO of Microsoft AI Mustafa Suleyman), and Elon Musk claiming AI and robotics are hitting like a “supersonic tsunami” which will lead to a phase where “work will be optional”.
On the opposite side of the ‘AI and machines will take over the world’ argument are economists, industry analysts, and structural experts arguing that the above views suffer from technological determinism – the mistake of assuming that because a technology can do a task, it will immediately and fully replace the person doing it.
Below is a summary I compiled from a conversation I had with Gemini on the issue:
1. The Productivity Paradox (Innovation vs. Replacement)
Economist Dan Davies and others argue that the goal of true innovation isn't to replace humans but to expand what they can do.
The "Bottleneck" Theory: When AI automates a task (like writing a first draft of a legal brief), it doesn't necessarily eliminate the lawyer. Instead, it moves the "bottleneck" to the next stage, such as high-level strategy or client negotiation. As the cost of "drafting" drops, the demand for "legal strategy" often increases, leading to a net increase in work.
The Jevons Paradox: Historically, as a resource becomes more efficient to use (like data processing), we don't use less of it; we find infinitely more ways to use it. Lowering the cost of white-collar output may simply lead to a massive explosion in the volume of professional services required.
2. The "Acemoglu" Critique (Pro-Worker AI)
Nobel laureate Daron Acemoglu (MIT) is a leading skeptic of the "inevitable" job apocalypse.
Misguided Agenda: He argues that the current "AGI" obsession is a "misguided agenda" by tech CEOs. He believes AI’s greatest value is as a complement to human labor.
The Choice, Not the Fate: Acemoglu emphasizes that job displacement is a choice made by management and policymakers, not a law of nature. He points out that if companies use AI only to cut costs, they miss out on the technology’s ability to create entirely new products and services that require human oversight.
3. Structural and Institutional "Friction"
Hyper-growth predictions often ignore the "real-world" friction that slows down technology adoption in professional settings:
Legal & Regulatory Barriers: In 2026, we are seeing a "patchwork" of new AI laws (like California's AB 853). These laws require transparency, bias audits, and human-in-the-loop requirements. If a judge or a regulator requires a human to sign off on a decision for liability reasons, the job cannot be fully automated.
The "Last Mile" of Accuracy: While AI is 95% accurate, the remaining 5% ("hallucinations") is where the professional risk lies. In medicine, law, and finance, a 5% error rate is catastrophic. This necessitates a "Human-in-the-Loop" for the foreseeable future.
Data Silos: Many corporations are finding that their internal data is too messy or "siloed" to actually run the sophisticated AI agents that CEOs boast about in earnings calls.
4. Historical Precedent (The "Wolf" that never bit)
The Brookings Institution and Goldman Sachs have released 2025/2026 data suggesting that, despite the hype, the labor market remains remarkably stable.
The ATM Example: When ATMs were introduced, people predicted the death of the bank teller. Instead, the number of bank tellers increased because it became cheaper to open more branches, and the tellers' roles shifted from counting cash to selling financial products.
2022–2025 Data: Brookings notes that the percentage of workers in "high-exposure" AI jobs has remained steady since the launch of ChatGPT. We aren't seeing the mass migration into unemployment that a "tsunami" would suggest.
Where I come out on all this is that I put it in the ‘too hard to model’ pile. To some readers, that might sound like a cop-out, but in this instance, with a new technology that has the potential to be both scalable and influential in almost every aspect of life, who can model that with the infinite number of iterations such a technology could take?
Marx, writing during the Industrial Revolution, predicted capitalism would periodically devour itself: firms replace labor with machinery to boost profits, but competition diffuses the technology, drives prices to marginal cost, and the gains get competed away. Meanwhile, displaced workers lose purchasing power, hollowing out the demand the whole system depends on. Production rises, but no one can afford to buy what's produced – the contradiction between production and realization.
Schumpeter offered the obvious rebuttal 80 years ago: creative destruction doesn't just destroy; it creates industries we can't yet conceive of.
History has repeatedly shown that periods of transformative productivity gains ultimately accrue to the consumer through lower prices, more leisure, and a higher quality of life. Marx's error wasn't diagnosing the disruption; it was underestimating the system's ability to adapt.
Instead of anchoring on a forecast or a theory, I prefer to keep an open mind and retain flexibility in navigating the volatility it's creating for markets. One thing I am confident about is that if AI were to disrupt the labor market as some predict, it's not even remotely compatible with the debt-based monetary system the U.S. currently operates on. The largest revenue line item for the U.S. Treasury is income taxes and other taxes on work-based compensation. For example, current recipients of Social Security are funded by those in the workforce who pay into a Social Security Trust that is forecast to run dry in 2032. Look, I don’t want to go too far down this path because it doesn’t take too long to get to a dark place. My best advice is to pay attention, be flexible, and focus on those things that are within your control. Much of where AI is going is out of our control.
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”
Leon C. Megginson, summarizing Darwin’s ideas on natural selection.
Sticking with the theme of things that sometimes don’t align with how you thought they would, most investors following markets are aware of the $700 billion in capex spending the major hyperscalers are throwing at the AI arms race in 2026. As a result, this has weighed on their stocks, with most trading 10-25% off their all-time highs. Then you have Walmart, which has been a significant beneficiary of the AI investments it's made to optimize its business model. Just last week, Walmart entered the $1 trillion market cap club as its stock hit a new all-time high. What’s fascinating is that Walmart is now trading at a substantial valuation premium to Mega-Cap Tech group (see chart below).
Here is a chart tracking Walmart’s annual operating income over the past 20 years. Operating income is up ~73% over this period which amounts to a +2.6% compound annual growth rate (CAGR).
Below is Meta’s operating income over the same 20-year period: +166,500% for a CAGR of +45%.
Here’s Nvidia: +20,275% for a 30.5% CAGR
Amazon: +19,900% for a 30.3% CAGR
Alphabet: +8,500% for a 25% CAGR
Apple: +8,218% for a 25% CAGR
And, Microsoft: +780% for a 11.5% CAGR
Now, to be fair, outside of Microsoft, the last twenty years capture the hyper-growth stage of these Mega-Cap Tech companies almost from their origin. Whereas, the last twenty years for Walmart were when it was already a stable, mature retail business. But it's highly probable that Walmart’s growth in operating income going forward is not too different from what it has been. While the growth rate of the Mega-Cap Tech group is without question going to slow from its hyper-growth stage, it’s reasonable to expect they continue to fall in the +10 to +20% range.
There are numerous other factors to consider in making these comparisons for investment purposes, but this simple illustration highlights how complicated and disconnected markets can get from most people's conception of fundamental reality.
Let’s close out this week's note with some thoughts on the recent Supreme Court decision that Trump doesn’t have the authority under IEEPA to implement his tariff ambitions.
Markets around the world will be spending the next several days digesting the new tariff arrangements. Saturday’s increase to 15% (up from 10% on Friday) of the blanket tariff Trump imposed after the Supreme Court announcement has markets unsettled to kick off the week. The reaction on Friday to the Supreme Court announcement was muted because this outcome was widely expected. Even Trump immediately pivoting to Plan B (10% tariffs under Section 122) was a net positive relative to where they were on Thursday. But that didn’t last long with Trump on Saturday morning pushing the level to the full 15% levy under this provision. So, at least for now, the moving chess pieces basically leave the effective tariff rate close to where it was, at around 16%.
I think that once we get beyond the initial knee-jerk reactions, this is a net positive for global markets. What I think is most important is that this removes the uncertainty of worst-case outcomes and puts a pin in President Trump’s tariff war. These 15% blanket tariffs expire in 148 days, and there is zero chance that he is going to get 60 votes in the Senate for an extension. Yes, yes, Trump has other avenues beyond Section 122, including 301 and 338 trade authority, but these have to go through lengthy processes before they can ever be enacted. What the IEEPA tariffs gave Trump was the ability to slap any tariff on any country at any time. But only with the Congressional approval he knew he would never attain. Therein lies the rub. But because he thought he would get away with it, the President used tariff threats on selected countries of 35%, 50%, 75% or 100% to bring them to the table and negotiate trade deals that were completely one-sided, or massive direct investment pledges into the United States, which were signed under a quid pro quo from a tariff threat that was just deemed as illegal.
For global investors wondering which countries stand to benefit the most from what transpired on Friday, they include China, India, Vietnam, and Brazil – their tariff rates are set to recede the most. What was a 16% effective tariff rate last week will dive to 9% by the end of the summer. This could be very impactful to future inflation prints, which may be enough to get the Fed back into focusing on the weakness in the labor market and a shift back to an easing bias.
I’m going to sign off with one final thought, as this note has already become too long. Diversification is not a dirty fifteen-letter word. Yes, there are times when it drags on performance as risk assets are racing higher, but in the long run it’s one of the best risk management strategies. Last year (and so far this year), it's more than proven its value, with the S&P 500 index ranking 76th out of the 92 major benchmarks tracked by Bloomberg in 2026. But it's not just foreign stocks outperforming the S&P 500; so are commodities, precious metals, and even the bond market. I’m not saying U.S. equities are a bad place to be; I expect them to perform fine in 2026, but I do think other areas will continue to outperform.
The articles and opinions in "Capital Market Musings and Commentary" are for general information only, and not intended to provide specific investment advice. Performance, dividends and other figures have been obtained from sources believed reliable but have not been audited and cannot be guaranteed. Past performance does not ensure future results. Investing inherently contains risk including loss of principle. Advisory services offered through Casilio Leitch Investments, an SEC registered investment advisor. Copyright © 2023 Casilio Leitch Investments. All Rights Reserved.