The equity market may finally be entering a sustained rotation away from Big Tech after years of failed attempts, according to Wells Fargo.
In a new CNBC interview, Wells Fargo chief equity strategist Ohsung Kwon says the conditions driving repeated false starts over the past three years are now materially different, with physical and financial tailwinds reshaping market leadership.
Kwon says investors have heard similar rotation calls before, but those moves repeatedly collapsed as money flowed back into AI and mega-cap technology stocks.
“And we have seen this move before. Every December and into January, all the strategists come out and call for a rotation, and it lasts for like two months or so, and it sort of rotates back into AI. I do think this time is a little different, that we are seeing physical tailwinds for the first time in three years.”
Kwon says one of the clearest signals is a change in how equities respond to interest rates, particularly the relationship between large-cap tech and smaller cyclicals.
“Also, we started seeing a change in reaction function in the equity market. So over the past three years, higher rates meant the Mag 7 were outperforming the Russell 2000. Now this is starting to change. And I think that’s driven by two reasons. One is that the market’s interpretation of higher rates is changing from higher rates are restrictive to cyclicals to higher rates are being driven by cyclicals.”
The reversal, Kwon says, breaks a key dynamic that fueled Big Tech dominance.
“[Higher rates mean Nvidia and others are outperforming] used to be the case for the past three years. That’s now starting to change. And I think one of the reasons is because a lot of these hyperscalers are issuing a lot of debt. Just in Q4, the four big hyperscalers raised close to $100 billion.”
As a result, he says, free-cash flow dynamics are deteriorating just as interest-rate exposure is increasing.
“Their duration is also lengthening because of it, because free-cash flow is coming down because they are investing so much in CapEx. Their free-cash flow margin is now going to be below the rest of the index. The free-cash flow conversion, so free-cash flow versus net income, that’s going to be just 50%.”
Taken together, Kwon says these shifts mark a structural change rather than another short-lived rotation attempt, signaling that Big Tech’s multi-year dominance may finally be losing momentum.
Disclaimer: Opinions expressed at CapitalAI Daily are not investment advice. Investors should do their own due diligence before making any decisions involving securities, cryptocurrencies, or digital assets. Your transfers and trades are at your own risk, and any losses you may incur are your responsibility. CapitalAI Daily does not recommend the buying or selling of any assets, nor is CapitalAI Daily an investment advisor. See our Editorial Standards and Terms of Use.