Investors’ biggest conundrum right now

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The most popular trade of the past three years has hit a speed bump. Or maybe it’s nearing the end of the road.

That’s one of the biggest debates happening in markets right now. A group of large technology stocks that have benefited from momentum in the AI trade have lagged over the past week.

Palantir (PLTR) is perhaps the most notable this week. A flagship of the AI bullish narrative, the stock had fallen almost 20% from its most recent all-time high amid a six-day losing streak that ended on Thursday.

But zoom out over the past year, and the stock is up more than 375%.

As the stock chart shows, that’s a hefty return from when the stock was trading hands at $30 a year ago. So some profit-taking in this stock, or any other AI darlings, would make sense.

But the trajectory also raises another question.

Clearly, there have been dips in the stock over the last year, like the 40% drop from February’s high of $125 to an April low of $74. And now it’s more than doubled since that low, along with a slew of other AI-related stocks that ripped off the April bottom.

So is this just another buyable dip in the AI bull market rally, or should investors really be preparing for the end of a decade of dominance for large-cap stocks?

That question — whether it be about Palantir stock or any other large-cap technology name — is at the core of the market action over the past week.

The Russell 2000 is up about 6.7% since the start of August, outperforming the S&P 500’s roughly 2% gain. Healthcare (XLV) and Materials (XLB) are leading the sector action after lagging for most of this year, while Technology has been the clear laggard as the worst-performing sector in the month.

Small caps have had their moments over the past two years, happening in fits and starts. They’ve even been a popular pick among Wall Street strategists making predictions for the year ahead. But those moments just haven’t seemed to materialize into a full-fledged rotation, as the Russell 2000 Index is up just 4.5% over the past year and hasn’t reached a record close yet in this bull market run.

But here we find ourselves, back in the big debate as to whether the rotation is actually happening this time, for real. There are, of course, arguments on both sides.

“History would suggest there is more to go in cap-weighted dominance,” Bank of America’s head of US equity and quantitative strategy, Savita Subramanian, wrote in a note to clients this week. “But if the Fed’s next move is a rate cut, and if the Regime indicator is shifting to a Recovery, we think the run may be closer to done.”