Market Rotates From AI Darlings to Hard Assets as Nvidia's Valuation Tumbles

The Great Rotation: A Pivot to Physical Assets

One of the defining market trends of 2026 is a clear rotation away from 'asset-light' software companies and towards businesses with substantial physical infrastructure. Dubbed the 'HALO' trade by analysts at Goldman Sachs—short for 'Heavy Assets, Low Obsolescence'—this strategy focuses on firms that own scarce, tangible assets with high barriers to entry.

This investment theme has performed strongly, with a strategy that buys capital-intensive stocks while selling capital-light ones gaining approximately 20% this year. European sectors focused on heavy assets are up 15% year-to-date, contrasting sharply with a 2% fall for an index of capital-light firms. The sheer scale of planned AI spending, with memory-chip maker Micron alone pledging £250 billion in the U.S., reinforces this shift towards tangible infrastructure.

Analysts believe this trend is entering a new phase. The initial gains came from investors re-evaluating these companies and paying higher prices for their earnings. Now, future performance is expected to be driven by actual earnings growth as massive capital spending in key areas starts to pay off. Global capital spending is increasingly concentrated in data centres, semiconductors, utilities, and defence, which are projected to make up over 40% of the total in 2026, a significant increase from 25% in 2022.

AI & Semiconductor Sector Under Scrutiny

The AI boom is facing a reality check as investors grapple with the colossal costs of building the required infrastructure. This has put pressure on some of the market's biggest names while creating enormous opportunities for others in the supply chain.

The AI Spending Arms Race Heats Up

The broader group of technology giants, including the 'Magnificent Seven', has lost momentum in 2026, lagging the wider market. A primary reason is the eye-watering spending on AI, projected to exceed $700 billion this year alone. This massive outlay is weighing on the cash they have left over after investments.

In a significant strategic pivot, Meta Platforms now plans to start producing its own in-house AI chip, codenamed 'Iris', in September. This move is designed to reduce its dependence on outside suppliers like Nvidia and is part of a plan that could see it spend up to $145 billion this year. By joining Amazon and Google in designing custom silicon, Meta confirms a trend that spreads the financial rewards of AI to manufacturing partners like TSMC and Broadcom. While shareholders may question funding such projects, especially with cheaper Chinese AI alternatives emerging, it is a clear signal that the demand for physical AI infrastructure is not slowing down.

Nvidia's Valuation and Enduring Demand

Nvidia, the poster child for the AI revolution, has seen its market value fall by around £1 trillion since mid-May. Its valuation has fallen to its lowest level since early 2019, making it cheaper relative to its expected earnings than the broader stock market for the first time in years. The stock now trades at just 18 times its forward earnings, below the S&P 500's average of 20.

Despite this price drop, the underlying demand for its products appears robust. The recent announcement that SpaceX's latest AI model, Grok 4.5, was trained on "tens of thousands" of Nvidia's newest chips reinforces the company's technical dominance. If Grok 4.5 proves competitive, it will serve as another major validation of Nvidia's hardware, suggesting that fears about its position may be overblown.

Memory Chip Makers Capitalise

The immense demand for AI components is creating huge winners further down the supply chain.

• Micron Technology: The memory chip specialist is accelerating its U.S. investment programme to $250 billion through 2035, up from a previous $200 billion commitment. The goal is to produce 40% of its key memory chips in America. The news sent its stock up 4.5%.
• SK Hynix: The South Korean chip giant made a spectacular debut on the Nasdaq, raising an impressive $26.5 billion in the largest-ever first-time U.S. listing by a foreign company, surpassing Alibaba's 2014 record. The deal saw huge demand, with institutional orders reportedly seven times the number of shares available, highlighting intense investor appetite for key AI hardware suppliers.

China Enters the Ring

Chinese AI firms are also attracting huge investment as they race to compete with American rivals. Zhipu AI, a language model developer, recently announced plans to raise $4 billion in new funding. This follows another Chinese firm, DeepSeek, securing over $7 billion in its first funding round. This signals that the AI investment trend is becoming a global phenomenon, with Chinese companies emerging as serious contenders.

Sector Spotlights: Winners and Losers Emerge

Across the market, changing economic conditions and strategic shifts are creating a clear divide between thriving and struggling companies.

PepsiCo Feels the Squeeze

PepsiCo's latest earnings beat analyst expectations, but a closer look reveals potential trouble. Sales volumes in its crucial North American drinks division fell by 4%, suggesting it is struggling to maintain market share. Despite cost-cutting measures that have improved profit margins, the results have not convinced investors that its turnaround plan is working, especially with activist investor Elliott Management pushing for changes. The company's shares fell 3.3% on the news, while rival Coca-Cola's stock remains near all-time highs.

Airlines Show Resilience

In a positive sign for consumer spending, Delta Air Lines kicked off the earnings season with strong results and a confident outlook. The carrier beat profit forecasts and issued third-quarter guidance that was ahead of analyst expectations. Management stated that robust demand for premium travel is allowing them to pass higher fuel costs on to customers, suggesting pricing power remains firm in the sector. This provides a reassuring signal about consumer health, especially for services and experiences.

Tobacco Giants Find New Growth in Smokeless Products

Institutional investors are beginning to look at 'Big Tobacco' in a new light as the industry pivots towards smokeless alternatives like nicotine pouches. A more favourable regulatory outlook in the U.S. is helping to boost prospects. Philip Morris International is leading this charge with its Zyn brand, which has captured a significant share of the American market. Rivals British American Tobacco and Altria Group are also stepping up their efforts to transition away from traditional cigarettes.

Volkswagen Plans Major Restructuring

German carmaker Volkswagen has announced it may cut its model lineup by up to half in a major strategic overhaul. The automotive giant has been hit by fierce competition from Chinese brands, U.S. tariffs, and tough regulations in Europe, which have seen its profit margins shrink significantly between 2021 and 2025.

Apparel Industry Splits Under Pressure

The global clothing industry is facing a sharp divergence. Brands like Levi Strauss and Fast Retailing (owner of Uniqlo) have raised their annual forecasts by focusing on direct sales to consumers and premium products. In contrast, Nike continues to grapple with unsold stock and weak consumer demand. This is happening as manufacturing costs rise, partly due to extreme heat affecting factories in Asia.

Crypto Focus Shifts to Regulation and Adoption

For the first time in a while, the cryptocurrency market is moving based on policy developments in Washington rather than geopolitical events or pure price speculation. This shift towards maturity suggests the industry's future path will be carved out in committee rooms, not just on trading screens.

Investor attention is fixed on potential US legislation, like the CLARITY Act, which could provide the first comprehensive rulebook for digital assets. A clear regulatory framework would be a significant catalyst, potentially opening the door for more mainstream and institutional products. The next few weeks are seen as critical for progress before political attention shifts elsewhere.

Meanwhile, adoption by the traditional financial system is accelerating. In a landmark move, the global payments network SWIFT has gone live with a blockchain-based ledger. The project, developed with 17 major institutions including HSBC, Citi, and UBS, aims to make cross-border payments faster and more efficient using tokenised assets. This is a powerful signal that the world's biggest financial players are now actively integrating blockchain technology into their core infrastructure.

Economic & Geopolitical Watch

Broader economic data and international relations continue to influence market sentiment.

Oil & Gold React to Shifting Risks

Oil markets are providing a clear example of shifting investor focus. Despite fresh US strikes in the Middle East, the price of Brent crude has slipped towards $76 a barrel. The primary reason is the return of Iranian oil to the market, which has offset supply concerns and drained the 'war premium' from prices. Traders are treating the conflict as a manageable supply issue rather than an open-ended crisis. In precious metals, gold has remained steady above $4,100, supported by a softer US dollar but capped by worries over potential interest rate rises.

US Labour Market Shows Signs of Cooling

The U.S. labour force participation rate—the share of the population either working or looking for work—fell to 61.5% in June, its lowest point since 1976, excluding the pandemic period. The data showed 720,000 people left the workforce, a trend economists attribute to long-term demographic shifts as much as to a slowdown in demand for workers.

US Housing Market Remains Tense

The American property market presents a mixed picture. Sales of existing homes unexpectedly dropped by 2.4% in June compared to May, but they were actually up 2.8% compared to the same month last year. This suggests buyers are gradually returning but not rushing in. Affordability remains the biggest hurdle, with the median house price hitting a new record of $440,600. With mortgage rates staying above 6%, a significant recovery in the second half of the year appears unlikely.

US-Iran Diplomatic Overtures

Despite recent military actions and tense rhetoric, the United States is reportedly set to engage in 'technical talks' with Iran. This development comes shortly after President Donald Trump declared a ceasefire with Iran was 'over' during a NATO summit, highlighting the rapid and often unpredictable shifts in the geopolitical landscape.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).