Why a $1.3 billion CIO says it's time to dump AI hardware stocks and pile into these 2 sectors instead
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- AI hardware stocks have been selling off amid a broad rotation that's hammered the momentum trade.
- Richard Reyle, CIO at Questar Capital Partners, said the stocks are still an "epic short."
- He flagged to other areas of the market he likes that are cheap compared to more crowded trades.
AI hardware stocks have had a good run, but it's time for investors to move on, according to a chief investment officer overseeing $1.3 billion.
"These stocks have been blown up so much to the upside," Richard Reyle at Questar Capital Partners told Business Insider this week.
"I said a couple of weeks back that these were an epic short, and you can see they've already come in a little bit, and I would still say they still fit that bill," he said.
Semiconductor stocks have struggled in the last few weeks following a burst of bullishness in the second quarter that boosted the iShares Semiconductor ETF 111% between March 30 and June 22. The index has since fallen 18%, but is still up 70% in 2026.
Investors have grown skeptical lately that such eye-watering gains are sustainable, and the momentum trades that were the top performers in the first half of the year have begun to unwind. Memory makers and chip firms are ground zero for the market's latest rotation.
Reyle shares investors' concerns about returns on AI spending, and said that even an outright pullback in capex wouldn't be needed to take the air out of the chip-stock bubble. Rather, just a slowdown in the the rate of spending growth could do it.
He drew a parallel to the mid-2000s housing bubble.
"It was a deceleration in the rate of price increases in housing that started the bubble to pop, and the same thing will happen here," Reyle said, adding: "It's always the second derivative."
One warning sign that demand for memory and data centers could be starting to dip, Reyle said, is Meta selling some excess compute to other firms.
In addition to ongoing uncertainty about potential returns on AI infrastructure investments, Reyle said that cheaper models coming onto the market could cause a spending pullback and put a dent in the chip makers' earnings glut.
Reyles advised investors to start taking profits in memory stocks, warning that "mean reversion is coming."
2 trades to watch
To take advantage of this rotation out of AI hardware, Reyle said he's looking to two cheap areas of the market in particular.
First, he pointed to the healthcare sector, particularly pharmaceutical stocks. Rising global demand for GLP-1 drugs should fuel the industry, Reyle said, adding that he thinks Mounjaro and Zepbound producer Eli Lilly has 25% upside potential.
The healthcare sector is also historically defensive when the broader market and economy turns south, he said.
Plus, the healthcare sector trading at a forward price-to-earnings ratio of 17.9 compared to the S&P 500 at 20.3.
Second, he highlighted financials stocks, banks in particular.
A hot IPO market and heightened borrowing levels should help their revenues, he said. Banks have indeed posted record quarterly earnings numbers in recent days.
Banks' growing wealth management businesses should also propel earnings, he said.
One example of this is JPMorgan, which has opened new wealth management branches around the country in recent years in an attempt to add and keep clients. Morgan Stanley is another — the firm's wealth management business added what it said was a record $148 billion in new assets in the second quarter.
Like healthcare, the financials sector is also relatively cheap, trading at a forward PE ratio of 15.6.
Examples of funds that offer exposure to these trades include the State Street Health Care Select Sector SPDR ETF (XLV), the VanEck Pharmaceutical ETF (PPH), the Vanguard Financials ETF (VFH), and the Invesco KBW Bank ETF (KBWB).
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