Market Is Hit With Rotational Chaos and a CapEx Conundrum
Here's the issue that most market pundits are missing in a very tricky environment.
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The market has been undergoing a rotational correction for a while now. It began in November 2025, when the Magnificent Seven reached a new all-time high, and since then, we have observed a variety of shifts, with different groups and sectors leading and lagging.
On Wednesday, momentum and growth stocks were on the receiving end of corrective action. We have been experiencing rotational action within the AI sector for several weeks, with AI-related software bearing the brunt of the damage.
Momentum Correcting in a Vacuum
The rotational action out of software expanded on Wednesday to some semiconductor names and other high-beta momentum stocks. What was most unusual about the move was that high-momentum stocks usually don't correct in isolation. While the Innovator IBD 50 was hit for a loss of 3.7%, breadth on the NYSE remained positive, and only 50% of all stocks finished with losses.
Typically, when there is a correction in momentum stocks to this degree, it occurs in the context of broader market corrections. Since momentum stocks are, by definition, high-beta, they are usually the biggest decliners when the entire market hits a wall.
The Valuation Misconception
The issue that most market pundits are missing is that many areas of the market are not grossly overvalued. There is a tendency to focus only on indexes and their valuations, but this overlooks the fact that, outside a small group of mega-cap technology and AI names, the market isn't wildly expensive.
Many of the stocks that sold off on Wednesday have extremely high P/Es that make them look pricey, but they also have very high growth rates, which makes the valuations much more reasonable. While the AI sector is suffering the most from this rotational correction, there is also the backdrop of wild volatility in silver, gold, and commodities, along with a deep correction in bitcoin and cryptocurrencies that doesn't appear to be over yet.
Alphabet's Signal and Amazon's Turn
The immediate question for investors is whether the Amazon (AMZN) earnings report Thursday night, combined with Alphabet's (GOOGL) report Wednesday night, will help the AI sector finally stabilize.
The Google report was quite good, with Search business growth accelerating to 17% year over year and Cloud to 48%. This resulted in revenue 2% above consensus estimates. The problem was that FY26 CapEx guidance came in far above expectations. That large increase in CapEx is concerning investors who worry there will not be an adequate return on the investment.
While that is a concern for companies such as Microsoft (MSFT) , bullish analysts argue that additional CapEx investment can generate healthy returns and sustain growth in the coming quarters. So far, the analyst community remains upbeat on Google. We are seeing price target increases across the board, with Citi raising its target to $390 from $350 and JPMorgan raising its target to $395 from $385.
Strategic Game Plan
Amazon is on deck and will face similar issues with CapEx spending, but the good news is that the increased spending is helping sectors like data centers and semiconductors. Nvidia (NVDA) is already seeing a bit of a bounce, up 1.65% early on Thursday.
It is a very tricky environment right now with the rotational action, worries about CapEx, and the revaluation of high-P/E stocks. The good news is that this messy action creates mispricing that offers astute traders some good opportunities. The key is to understand the fundamentals and valuation, and then look for sound technical entry points.
At the time of publication, Rev Shark was long GOOGL and NVDA.
