Investors chase cheaper, smaller companies as risk aversion hits tech sector

• The Russell 2000 small-cap index outperformed with a 3.5% gain on Friday, while the iShares Expanded Tech-Software Sector ETF fell 9.1% for the week despite a late rally, and bitcoin dropped to a 16-month low of $60,017 before recovering to near $70,000.
• Economically sensitive sectors including energy, materials, staples, and industrials have posted double-digit gains year-to-date, significantly outpacing the S&P 500's 1.3% rise as investors move away from crowded mega-cap tech trades.
• Market strategists warn that doubts about AI hyperscalers' profit generation and the impact on businesses that AI may displace are driving investors to reassess risk exposure and seek defensive positions rather than buying previous dips.

Market Summary: Rotation from Tech to Smaller, Cheaper Stocks

Key Market Movement:

Investors are rotating away from high-flying technology stocks into smaller, cheaper companies amid growing risk aversion. The Dow Jones Industrial Average hit 50,000 on February 6, 2026, even as software stocks declined. On February 8, the Russell 2000 surged 3.5%, outpacing the S&P 500's 1.78% gain and the Nasdaq 100's 2% bounce.

Main Companies and Sectors:

AI "hyperscalers" including Amazon, Microsoft, and Alphabet face increased scrutiny over AI investment returns. Several Magnificent Seven stocks did not participate in Friday's rally. The iShares Expanded Tech-Software ETF rebounded 3.5% Friday but finished the week down 9.1%.

Market Rotation Details:

Energy, materials, industrials, and consumer staples show double-digit gains year-to-date, significantly outperforming the S&P 500's 1.3% rise. Defensive stocks are attracting capital as investors exit "crowded trades." Bitcoin dropped to a 16-month low of $60,017 before recovering to $70,000, still well below its October peak of $126,000. Silver remains below recent highs above $90/ounce.

Key Concerns:

Analysts cite persistent doubts about AI profitability and potential disruption to legacy businesses. Market volatility remains "staggering" as investors rebalance portfolios. Traditional dip-buyers show increased caution.

Outlook:

Strategists believe this market broadening represents a sustained shift rather than temporary rotation, ending a "protracted period" of megacap technology dominance. However, the turbulent nature of the transition has caught many analysts off guard.