February 10, 2026
The market is trying to hold two truths at once: AI spending is still accelerating in the real economy, but investors are no longer willing to finance every AI narrative at any price. That tension is exactly what is playing out in financial earnings—for example, upstream demand signals (TSMC’s January momentum, firmer memory pricing, networking and data-center hardware pushes) alongside governance, capex, and policy risks that can quickly reset multiples. For sector investors, the opportunity isn’t “buy AI” or “sell AI.” It’s owning the parts of the equity market where demand is observable, monetization is plausible, and balance sheets don’t require perfect conditions.
The macro overlay is improving at the margin. Inflation expectations are softer, the consumer is still spending but increasingly selective, and the growth outlook remains resilient enough to keep earnings expectations from collapsing. Disinflation matters because it tends to reduce pressure on the discount rate—the oxygen Growth sectors need to outperform when fundamentals remain intact. Research on sector behavior across inflation and rate regimes underscores how leadership shifts as inflation and rates change direction, with “duration” sectors often benefiting when disinflation takes hold.
Against that backdrop, the AI tape is splitting into two distinct trades: AI demand validation versus AI monetization and financing risk. The demand side looks real. Semiconductor and memory demand signals, combined with continued infrastructure product cycles, suggest the buildout hasn’t stopped. But investors have become more discriminating about how that buildout is funded and who earns attractive returns after capex. The market’s skepticism is less “is AI real?” and more “who captures the economics without blowing out free cash flow or leverage?”
The bullish tactical posture: overweight Technology and Communication Services, selectively
A constructive read of the current setup points to a selective overweight in Information Technology, paired with Communication Services as the monetization complement. Technology remains the primary conduit for AI capex, but the “right” exposure is not the most capital-hungry segment—it’s the subset with pricing power, visible demand, and credible cash-generation pathways. Communication Services matters because AI monetization often routes through platforms: distribution, engagement, advertising, and product ecosystems can convert AI usage into revenue faster than many infrastructure-heavy models.
US-domiciled retail ETF exposures
- Technology (core beta): XLK (Technology Select Sector SPDR)
- Technology (broader basket): VGT (Vanguard Information Technology ETF)
- Semiconductors (higher-octane AI capex sensitivity): SOXX (iShares Semiconductor) or SMH (VanEck Semiconductor)
- Communication Services (platform monetization): XLC (Communication Services Select Sector SPDR)
The way to use this basket tactically is to remember that Tech and Comm Services are “duration” exposures. If disinflation stays on track and long rates are stable, these tend to benefit. If tariffs, geopolitics, or energy volatility reintroduce inflation uncertainty and push real yields higher, the market can quickly rotate away from them—even if AI demand is still healthy.
The bearish tactical posture: underweight Consumer Discretionary and rate-sensitive “bond proxy” sectors
A bearish example from this same headline set is straightforward. Broad Consumer Discretionary exposure remains vulnerable if the consumer continues shifting toward value and necessities and if confidence is pressured by affordability concerns. Independent sector outlook frameworks have also leaned cautious on Discretionary in this kind of mixed fundamental environment.
In addition, Real Estate and Utilities can become duration traps when long rates re-volatilize. Disinflation can coexist with rate volatility; it doesn’t take a renewed inflation scare to pressure these sectors—just a market that decides the path to lower rates will be slower or bumpier.
ETFs to avoid (or keep smaller) in this tape
- Consumer Discretionary: XLY
- Real Estate: XLRE
- Utilities: XLU
Where Energy and Materials fit: a hedge against inflation and supply shocks
Rising commodity prices are the swing factor that can complicate a clean “disinflation → duration” playbook. If metals and energy inputs keep firming—whether from AI/data-center power demand, supply constraints, or geopolitics—then Energy and Materials can regain leadership even if broader inflation measures remain contained. For sector investors, these are often best treated as a hedge rather than the core thesis unless commodity inflation becomes persistent.
Clean hedges
- Energy: XLE
- Materials: XLB
Conclusion: Time for a Well-Diversified Portfolio that Avoids some Key Vulnerabilities
The bottom line is constructively bullish for a sector investor—selectively. The upstream evidence of AI demand looks strong enough to keep the theme alive, and the disinflation impulse improves the backdrop for longer-duration sectors. But the market is no longer rewarding “AI exposure” broadly. The next leg higher is likely to be driven by AI exposure that can be financed cleanly and monetized credibly, which argues for overweighting Technology and Communication Services via liquid sector ETFs, adding semis for torque if risk appetite improves, and staying underweight broad Discretionary and rate-sensitive “bond proxy” sectors until the consumer and the long end of the curve look less fragile. Energy, Materials and Industrial stocks remain the best way to play commodities reflation and to hedge against potential structural inflation. The direction of interest rates will be key and we should anticipate mean-reversion when overbought OR oversold conditions materialize.
Sources consulted
- MSCI Research & Insights — inflation/rates and sector behavior framework.
- Charles Schwab — sector outlook commentary.
- State Street Global Advisors — XLK fund overview.
- State Street Global Advisors — XLC fund overview.
Other data sourced from Factset Research Systems Inc.
