A more skeptical view of AI winners makes sense, says Nomura
Equity investors hoping for a seasonal push to fresh record highs have been forced to wait. The S&P 500 has been churning in a narrow 180-point range since early December, hovering just below new peaks.
One reason bullish sentiment has stalled is that several of this year’s heavyweight winners have recently lost momentum. Nvidia, Microsoft and Broadcom have all stumbled, while smaller-cap former favorites — including CoreWeave, as well as energy- and quantum-related stocks — have also struggled in recent weeks.
For some investors, the pullback in so-called momentum stocks has raised fears of a deeper shift in market sentiment, particularly toward AI-related plays, with implications for 2026. But Charlie McElligott, Nomura’s cross-asset strategist, argues that this kind of retreat is typical for this time of year — and that the AI trade still has room to run.
“The AI phase shift into ‘adulthood’ has moved into more tumultuous territory,” McElligott wrote in a note shared with MarketWatch. He says markets are transitioning away from early-capex euphoria toward a tougher, more disciplined evaluation of AI investments.
That sharper scrutiny — focused on balance sheets, return on investment, margin pressure and energy constraints — is healthy, in McElligott’s view. Still, he believes much of the recent weakness is simply old-fashioned profit-taking after a strong rally, amplified by heavy leverage in the trade.
Historically, that pattern fits. McElligott notes that the momentum factor has typically suffered a December drawdown, averaging a 1.1% pullback since 1995.
December is also the weakest median month for one-year momentum over the past three decades. Since 2016, the median decline has been closer to 2.7%, as investors position for the “January effect” and rotate into prior laggards.
In practice, that means last year’s winners are being sold to fund broader portfolio exposure, particularly to stocks seen as beneficiaries of a stronger economy in 2026.
Crucially, McElligott says this rotation does not signal abandonment of AI-linked stocks. He points to options market activity during Wednesday’s selloff, where traders were willing to sell downside protection on AI proxies such as Broadcom, Eaton, Alphabet, Nvidia and Vistra. Selling puts suggests expectations for limited further downside — an important signal from an inflection-point perspective.
In short, while AI enthusiasm is becoming more selective and disciplined, Nomura sees the current pullback as a seasonal reset rather than the end of the AI trade.
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