The market rotation out of technology and into value and international stocks continued in February. The S&P 500 Index, which has a 33% allocation to the technology sector, was little changed for the month and year-to-date. Value-oriented sectors like consumer staples and industrials outperformed, sending the Russell 1000 Value Index up 7% on the year. International stocks continued their strong 2025 run, gaining another 11% to start 2026.
The rotation began in late 2025 as advancements in AI continued to catch the market off guard. The big development over the past few months was the release of AI agents from frontier model developers like OpenAI and Anthropic. The agents have shown promise in automating repetitive tasks such as writing code. This prompted a selloff in software stocks, with the iShares Software ETF (IGV) falling 23% YTD.
The selloff began to hit other sectors this past month as fears spread that AI agents could ultimately replace large swaths of white-collar workers. This was amplified by a research report (linked below) late in February that proposed an economic bear case scenario relating to AI adoption. In this scenario, knowledge-based professionals in law, accounting, etc. are replaced by AI agents by the end of the decade. The layoffs in these sectors would spread through the economy, leading to a precipitous drop in consumption and surging mortgage defaults. While this scenario seems extreme and unlikely, investors were quick to “shoot first and ask questions later” leading to a broader selloff in the financials and professional services sectors.
Ultimately, no one knows for certain what the impact of AI will be on the economy and markets. The argument for AI being all hype and no substance seems misguided given the very real productivity benefits AI tools are already displaying today. These benefits will only continue to grow as the tools become better with each iteration. On the other hand, the scenario put forth in the paragraph above seems unlikely as well. Inertia is a powerful force, and companies and consumers are unlikely to drastically change their way of doing things in just two or three years. The most likely outcome appears to be somewhere in the middle, where the productivity and cost saving benefits of AI spread throughout the economy over a period of decades, like the adoption of the personal computer or the internet. While this scenario could lead to job losses, just as the internet eliminated some jobs, it will likely create additional jobs as well.
Aurdan portfolios are diversified across asset classes, geographies, and sectors. While growth stocks are down year-to-date, value and international stocks have provided compelling returns. Fixed income indexes that track investment-grade taxable and municipal bonds have also protected amid the selloff in growth stocks, rising 2% so far this year. We believe this diversification can protect investors should the worst-case scenario mentioned above play out but still capture a large portion of the benefits should the more likely base case scenario come to fruition.
As always, if you have any questions or concerns regarding your portfolio, please reach out to a member of the Aurdan team.
IMPORTANT DISCLOSURES
The views, opinions and content presented are for informational purposes only. The charts and/or graphs contained herein are for educational purposes only and should not be used to predict security prices or market levels. The information presented in this piece is the opinion of Aurdan Capital Management and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources, but we cannot guarantee the accuracy or completeness of the information, no liability is accepted for any inaccuracies, and no assurances can be made with respect to the results obtained for their use. The information contained herein may be subject to change at any time without notice. Past performance is not indicative of future results.