AI has been one of the biggest forces in the stock market. Large technology firms have spent huge sums on chips, data centers and AI tools. That has helped many technology stocks rise at a fast pace.
But the AI trade has also become crowded. If investors start to doubt the speed of AI profits, some may sell expensive technology stocks and move their money into other parts of the market.
This does not mean that AI is over. It also does not mean that technology stocks must fall for a long time. The key point is that a shift in investor demand can help sectors that have received less attention.
Recent market data already show signs of this shift. From June 1 to July 29, technology and communication services stocks fell 15%, while the S&P 500 fell less than 4%. The other nine sectors of the index rose a total of 4% over the same period. This shows that the wider market can hold up even when major technology names face pressure.
Four areas stand out in this type of market: healthcare, financials, industrials and materials.
Healthcare Could Be the Biggest Winner
Healthcare may be the clearest choice for investors who want less exposure to the AI trade.
The sector has already shown strong results. Over the past three months, the S&P 500 healthcare index rose 11.2%, compared with a 6% gain for the wider S&P 500. That is a large gap in a short period.
Money has also moved into healthcare funds. US-listed healthcare funds received $2.44 billion in July after they received $1.5 billion in June. This marks a clear change from the fund outflows seen before.
The reason is simple. Healthcare has its own sources of growth. Drug research, new treatments, medical devices and health insurance can support company profits without a direct link to AI stock prices.
There is also a valuation case. Healthcare stocks trade at about 18 times forward earnings. That is below the valuation of the S&P 500, even though the healthcare sector has a strong profit outlook.
State Street has also raised its view on healthcare to positive. It points to better managed-care trends, attractive valuations and strong progress in biopharma. Its forecast calls for healthcare earnings growth of about 19.3% in 2027, which would rank second among major sectors, behind technology.
There are risks, of course. Drug prices, health policy and insurance costs can hurt the sector. Still, if investors want a place outside AI, healthcare has a strong case.
Financials Offer a Different Source of Growth
Financial stocks can also benefit if investors move away from high-priced AI names.
Banks, insurers and other financial firms earn money from loans, credit, fees and capital markets. Their results depend more on the health of the economy than on the success of AI software or chips.
This can make financial stocks useful when investors want a different source of profit growth.
State Street has moved its view on financials from neutral to positive. It sees support from better economic conditions, loan growth, valuations and regulatory changes. It also sees a chance for a steeper yield curve if the Federal Reserve cuts rates rather than raises them. A steeper yield curve can help banks earn more from loans.
Financial stocks have already helped the wider market during recent technology weakness. Barron’s noted that older parts of the market, such as financials, real estate and energy, helped limit the damage from a sharp fall in technology and communication stocks.
The main risk is the economy. If growth falls sharply, banks can face higher loan losses and weaker demand for credit. But if the US economy stays firm, financial stocks could remain a strong alternative to expensive AI shares.
Industrials Can Benefit From the AI Boom Without Being AI Stocks
Industrials may look like a surprising choice, but the sector has a special link to the AI story.
AI needs physical infrastructure. Data centers need power, construction work, cooling systems, electrical equipment and other industrial products. As a result, many industrial firms can gain from AI capital spending even if they are not technology companies.
That creates an interesting balance. If investors lose interest in AI stocks because of high valuations, they may still want exposure to the real-world investment that supports the AI economy.
State Street has a positive view on industrials. It cites AI infrastructure investment, fiscal support for capital spending and defense demand as key sources of strength. It also notes that US factory activity has improved after a long period of weakness.
The US manufacturing PMI reached 54.5 in May, its highest level in four years. A number above 50 points to expansion. Nine of the 12 industries inside the industrials sector are expected to post double-digit earnings growth in 2027.
This gives industrial stocks a wider source of demand. They can gain from AI infrastructure, factory investment, defense orders and a broader recovery in US production.
The main concern is valuation. Some industrial stocks already have high expectations built into their prices. If economic growth slows, those high expectations could become a problem.
Materials Could Gain From Factory Growth
Materials form the fourth sector worth watching.
This group includes companies that produce metals, chemicals and other basic materials. Their results often improve when factories, construction and infrastructure activity rise.
The AI boom also gives materials a second source of demand. Data centers need large amounts of electricity. Power networks need upgrades. Batteries need metals such as lithium. New power systems also require copper and other industrial metals.
State Street has a positive view on materials because of higher US factory activity, strong demand for industrial metals and solid profit growth. It estimates 2026 earnings growth for the sector at 40%, the third-highest rate among major sectors.
Materials also have a reasonable valuation. Their next-12-month price-to-earnings ratio sits near the 46th percentile of their five-year history. That suggests the sector is not as stretched as some of the market’s most popular technology names.
Copper is especially important. Supply remains tight while demand from power networks, factories and AI infrastructure stays firm. Lithium also has a role because it is a key material for battery storage.
Materials can still face sharp price moves. Commodity prices can change fast because of trade policy, supply shocks, the dollar and global growth. So this sector may carry more risk than healthcare.
What Investors Should Watch Next
A fall in AI stocks does not guarantee gains for these four sectors. Much depends on why AI shares fall.
If AI stocks drop because investors think their valuations have become too high, healthcare, financials, industrials and materials could benefit from a shift toward cheaper or less crowded areas.
If AI stocks fall because the US economy enters a serious recession, the picture becomes less positive. Financials, industrials and materials could all face weaker demand. Healthcare would likely have the strongest defensive case of the four.
For now, the broader market shows that investors do not need technology to rise every day for stocks as a whole to perform well. Healthcare has already gained 11.2% over three months, while other sectors have also helped offset weakness in technology.
The bigger story is not the end of AI. It is the possibility of a wider market. If investors decide that AI stocks have become too expensive or too crowded, money may move toward sectors with different profit drivers.
Healthcare offers defense and new drug growth. Financials offer exposure to credit and economic health. Industrials offer a link to factories, defense and AI infrastructure. Materials offer exposure to metals, power networks and physical demand.
That makes these four sectors worth watching if the AI trade faces another period of weakness.
