U.S. stock markets saw a sharp divergence on Wednesday, with software stocks surging even as semiconductor and broader tech names sold off. The Dow Jones Industrial Average turned higher after a soft start, driven by a rally in Microsoft and other software firms. Palantir Technologies joined the advance, gaining alongside the software sector amid a notable rotation away from hardware and chip stocks.
The catalyst for the move appears to be growing skepticism about the sustainability of the AI trade. In a research note, Citi cut its overall weighting on technology stocks, warning that it's "difficult to see how everyone in AI/Tech path wins." The bank's cautionary stance comes as investors grapple with rising valuations and the potential for a shakeout among AI-related companies. Semiconducor shares, which had been a major beneficiary of the AI hype, were among the hardest hit.
Market reaction was mixed. The broader Nasdaq Composite faced pressure from the semiconductor sell-off, overshadowing the software rally. Investors moved defensively, with some analysts calling this rotation a healthy correction after a sustained run-up in tech stocks. The S&P 500 also showed resilience, buoyed by gains in the software subsector.
Citi's warning adds to a growing chorus on Wall Street that the AI trade may be overheated. While software names like Microsoft and Palantir still command premium valuations, the bank argues that profit-taking is prudent. No specific price targets were cited, but the note signals a shift in sentiment toward a sector that has dominated capital flows for more than a year.