Did Powell’s “Rate Cut Rally” Spark a Rotation in the Stock Market? Tech Stocks Start to Lag Behind

TradingKey - Federal Reserve Chair Jerome Powell’s unexpectedly dovish remarks at the Jackson Hole symposium ignited strong bets on a September rate cut and fueled a rebound in U.S. equities. However, for the week, tech stocks — long the market leaders — underperformed. Beyond the relative weakness in rate-sensitive sectors, deeper concerns about the AI growth narrative are emerging within the tech sector itself.

On Friday, following Powell’s surprise shift in tone — reversing his earlier stance on labor market risks and signaling an imminent policy adjustment — the S&P 500 rose 1.52% and the Nasdaq gained 1.88%. Yet, the Nasdaq still ended the week down 0.58%, underperforming the S&P 500, which rose 0.27%.

According to FactSet, the technology sector fell 1.6% last week, while sectors like materials, real estate, financials, and energy each posted gains of at least 2%. Meanwhile, the small-cap Russell 2000 Index surged 3.30%.

The Wall Street Journal reported that the prospect of lower interest rates is boosting many market segments — including real estate, banks, and manufacturers — while the outlook for the “Magnificent Seven” tech giants that have driven major indices to new highs this year may be losing clarity. 

These Wall Street favorites are now facing challenges: doubts about AI’s real potential, concerns over sky-high valuations, and rising competition from previously overlooked market segments.

The Financial Times noted that the divergence in sector performance last week may signal that investor enthusiasm for large-cap tech stocks is beginning to cool.

Nvidia’s market capitalization now exceeds $4.3 trillion, and most of the top 10 U.S. companies by market cap are tech firms. These giants account for 40% of the S&P 500’s total market value and contributed one-third of the index’s revenue growth over the past year, creating a “top-heavy” market structure.

Although prominent investors like Bridgewater continued to increase stakes in tech stocks like Microsoft in Q2, many retail investors are reducing their exposure to large-cap tech, saying they are satisfied with taking profits from an unbalanced portfolio.

Last week, OpenAI’s much-anticipated “PhD-level” GPT-5 model was widely criticized as “boring and dumb”, compounding concerns about AI’s commercial viability. This came amid CEO Sam Altman’s own warnings about AI investment overheating and an MIT report revealing that 95% of organizations see zero financial return from generative AI investments.

Venture firm Decibel wrote, “There’s been a vibe shift.” OpenAI promised a super-intelligent GPT-5, and Altman marketed it with a ‘Death Star’ teaser.

 “Instead, we got a model router.”

The Financial Times added:

“Up to now, what has been good for tech in general and for AI in particular, has been good for global stocks. If, however, something meaningful were to go wrong with tech in general and with AI in particular then, well, it does not take a genius to figure out where I’m going with this.”

As investor confidence in public tech stocks wanes, risks are also spreading to the private equity market. Amazon and Google are expected to spend $3 trillion on AI infrastructure over the next three years, with about half of that funding relying on private equity, private debt, and venture capital. Now, even these deep-pocketed backers are turning cautious.

PGIM Private Capital’s head said:

“It’s absolutely something that we talk about in every executive committee meeting. I don’t think it’s enough as a percentage of the private credit market that we can see a systemic shock if something were to go wrong here.”

UBS’s August report noted that private credit has become a key engine behind AI growth, with more capital expected to flow in over the coming months. The bank warned that while this fuels the AI boom, it also plants the seeds for overheating risks.