Billions of dollars are rotating out of AI-linked stocks and into insurers, small-cap companies, and other sectors that were gathering dust on institutional shelves. Non-tech US equity funds attracted $62 billion in inflows over just five weeks in early 2026, a figure that exceeded total inflows for the entirety of 2025.
The great unwind
Hedge funds have been deleveraging from US tech positions at what is being described as the fastest pace on record, with net selling observed in six of eight weeks around mid-2026. Sector exposure has dropped roughly 10% since early June alone.
Since June 22, select software stocks have added approximately $1.5 trillion in gains. Semiconductor firms, once the undisputed kings of the AI trade, have shed around $2.6 trillion. That’s a $4.1 trillion swing in relative value between two corners of the tech universe.
Insurance stocks hit record highs in late July 2026 as investors sought businesses with predictable cash flows and minimal exposure to the AI disruption narrative. The Russell 2000 small-cap index posted a 6% gain in early 2026, outperforming tech benchmarks and benefiting from more attractive valuations and sensitivity to domestic interest rate expectations.
HALO effect
A new acronym has entered the Wall Street lexicon: HALO, which stands for Heavy Assets, Low Obsolescence. Think utilities, insurers, industrials, and other businesses where a large language model is unlikely to replace the core product anytime soon.
Small-cap stocks are benefiting from a confluence of factors beyond just the tech exodus. Domestic-focused companies in the Russell 2000 tend to respond favorably when rate cuts are on the table, and their valuations relative to large-caps had stretched to historically wide discounts.
What this means for markets
Insurance and small-cap valuations still have room to run if the rotation persists. Record highs in insurance stocks might seem like a reason for caution, but the sector’s earnings growth has been underpinned by hard-market pricing dynamics that have nothing to do with AI hype.