Investors are not giving up on artificial intelligence (AI). Instead, they are becoming more selective about where they invest. Since semiconductor stocks peaked around June 22 of this year, money has been moving within the AI market rather than leaving it altogether.
Today, many investors see AI as three different opportunities:
- AI Infrastructure: Companies that make chips, networking equipment, power systems and data centers.
- AI Platforms: Cloud leaders such as Microsoft, Amazon, Alphabet and Meta.
- AI Applications: Software companies that build AI-powered products and services.
All three benefit from AI growth, but investors are becoming more focused on which group is most likely to generate future profits.
Semiconductor Companies Still Matter
Semiconductor companies remain at the center of the AI boom. Every AI model needs advanced chips, memory, networking equipment and servers. Large cloud providers continue to spend heavily on building AI infrastructure, supporting demand for chipmakers and related suppliers.
However, semiconductor stocks had risen sharply before their recent pullback. As valuations climbed, investors became more sensitive to any sign that spending growth could slow. The recent weakness appears to reflect concerns about expectations rather than doubts about AI demand itself.
The key debate today is whether earnings can continue growing fast enough to justify the strong gains these stocks have already achieved.
Hyperscalers Are Becoming More Attractive
Investors are increasingly focusing on the four big US hyperscalers.
These companies occupy a unique position because they not only fund AI infrastructure but also own the platforms through which AI services are delivered. As the AI market matures, many investors believe these companies may capture a larger share of long-term profits.
Potential sources of AI revenue include:
- Cloud services
- Enterprise software
- Digital advertising
- Consumer platforms
- AI assistants and productivity tools
A common way to think about this is the “picks-and-shovels” analogy. Semiconductor companies provide the tools needed to build AI (picks), while hyperscalers (shovels) are often in the best position to profit from using those tools.
As a result, some investors have shifted part of their exposure from semiconductor stocks toward large platform companies.
Software Is No Longer the Main Worry
Over the past year, many software stocks fell as investors worried that AI would increase competition and reduce the value of existing products.
Much of that concern is now reflected in share prices. Instead of treating all software companies the same, investors are beginning to separate stronger businesses from weaker ones.
Some specialized software products could eventually face competition from AI-powered alternatives. However, many enterprise software companies manage critical business functions such as financial records, supply chains, customer data, human resources and security systems.
These platforms are often deeply embedded in day-to-day operations and can be difficult and expensive to replace. In many cases, AI may strengthen their value by making them more useful and productive.
Looking Ahead
The recent market rotation should not be viewed as a move away from AI. Rather, we believe it reflects a shift in where investors believe the biggest future opportunities may lie.
The first phase of the AI boom rewarded companies that supplied the hardware. The next phase may favor companies that can turn AI investment into lasting profits.
Semiconductors remain essential to AI growth, but investors are increasingly focusing on hyperscalers and selected software companies that can monetize AI more directly. The market's attention is gradually shifting from who is building AI to who can profit most from using it.
Revenue Growth Is Gradually Shifting Toward Platforms and Applications
Sources: The Business Research Company, Research and Markets.com. There is no assurance that any estimate, forecast or projection will be realized.
Market review
Global equities were broadly unchanged in July 2026, although the headline result concealed an unusually severe rotation beneath the surface. Value stocks advanced while growth declined, and momentum suffered one of its sharpest drawdowns on record as investors took profits in crowded AI, semiconductor and other high-beta positions. Large caps were broadly steady, whereas small caps fell, showing that the rotation away from mega-cap growth did not translate into a uniform broadening of market participation. Non-US equities modestly outperformed those in the United States, with Europe and Japan proving more resilient than the broader Asia Pacific region.
Outlook
July’s market pullback showed why it is important to be careful when choosing AI-related investments. It also reminded investors that opportunities may exist beyond the few stocks that led the market higher earlier this year. We still believe AI is an important long-term growth trend, but we are also finding opportunities in other areas. In the United States, we see potential in sectors such as travel, insurance, health care and utilities, not just technology. We also continue to find attractive companies in Europe and Japan. A lasting easing of tensions with Iran could be good news for aerospace companies. It could also help other economically sensitive sectors by reducing inflation pressures and improving confidence in the economy. Overall, the recent correction has created a healthier mix of investment opportunities across different sectors and regions. We believe this is positive for diversified investors during the rest of the year.
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