As AI Slumps, the Value Trade Is Real
There is an emerging divergence between growth and value stocks early in 2026
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Equities staged a very slight rebound Tuesday after the previous week’s losses. The steam continues to go out of the AI narrative that has driven most of the gains in the overall market since late 2022. The collective value of the Magnificent Seven that has driven this rally is down roughly 7% so far in 2026. The technology sector has been whacked of late. Fears of AI disruption have pushed down the price-to-earnings ratio on the software sector to its lowest levels since 2014, even as earnings have not yet been impacted by the growing capabilities of AI.
The major impact of this huge surge in tech spending on the AI buildout is now being realized throughout the economy and markets. As I highlighted in my article on Tuesday, free cash flow at the four biggest hyperscalers in 2024 was $237 billion, which dropped to $200 billion in 2025. Based on capital expenditure guidance for 2026, free cash flow could drop to $50 billion or less this year. That is a huge change, as much of the technology sector has transitioned from asset-lite to a very capital-intensive industry in a short span of time.
While the surge in tech spending continues to be a primary driver of gross domestic product growth, it is hurting other parts of the economy. I believe AI disruption fears have been contributing significantly to the "no fire, no hire" jobs market in recent quarters. With recent job revisions, job growth averaged just 15,000 a month in 2025. Outside of recessions, that is the lowest level of job growth since 2003. If/when AI starts to replace employees, job growth could quickly go negative.
We are already seeing a significant market rotation going on early in 2026. Fears of coming disruption from growing AI capabilities have started to play daily whack-a-mole with different industries within the market of late. Insurance brokers, wealth management firms, commercial real estate services and trucking/logistical concerns in recent training sessions. This is likely going to be a continuing theme here in 2026.
Over the longer-term, AI is going to boost U.S. productivity on par with the birth of the internet, if not on a larger scale. But getting to that state is likely to be increasingly painful as various industries go through considerable transformation. If I were a paralegal, entry level financial analyst, office assistant, recent law grad or worked in logistics I would be pessimistic around my longer-term career prospects right now.
One of the emerging trends in markets in the first seven weeks of 2026, is value stocks are significantly outperforming growth stocks. As professor Jeremy Siegel pointed out earlier this week, value stocks recently have seen their largest surge vs. growth stocks in four years. I highlighted two value stocks I have upped allocations to within my portfolio, Ford (F) and Upwork, Inc. (UPWK) , in my piece on Tuesday. Given that I think this trend should continue after more than three years of the Magnificent Seven delivering most of the gains in the market, in Friday’s column I will add a couple of other value stocks to Tuesday's list.
At the time of publication, Jensen was long F and UPWK.
