Liz Ann Sonders, chief investment strategist at Charles Schwab, says market rotation has emerged as the dominant trading pattern, with investors rapidly shifting focus from one opportunity to the next amid ongoing AI disruption.
“The new momentum trade is rotation,” Sonders said in an interview with CNBC, describing an environment where “short attention span money” perpetually chases the latest market narrative while selling first and researching later.
The strategist noted that AI-driven narratives are creating a volatile backdrop where micro segments of the market face sudden disruption, often leading to indiscriminate selling.
“Baby-out-with-the-bathwater kind of trading backdrop,” Sonders explained, adding that dip-buyers are becoming more selective rather than broadly lifting the entire market. Institutional investors in particular are looking for opportunities in areas that have become oversold following rapid 180-degree narrative shifts.
Despite the choppiness, Sonders believes the broadening out of market participation has staying power. She pointed to data showing that only 20% of stocks within the S&P 500 (SP500) have outperformed the index over the last year, compared to roughly 60% over the last month.
However, she cautioned that it is no longer as simple as just buying equal-weight indices (RSP) relative to cap-weight—rapid-fire sector rotations will continue.
The fundamental case for broader market participation rests on shifting earnings dynamics. While the Magnificent Seven tech giants—Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA)—still show stronger growth relative to the rest of the market, Sonders emphasized that “the direction of travel matters as much as the level,” noting a deceleration in their earnings growth pace alongside a pickup in expectations for more cyclical sectors.
This earnings shift also explains why non-U.S. markets are outperforming the tech-heavy American market. “Our market has been very high-tech driven, very knowledge driven, where it’s more of those traditional cyclical areas driving the economies of many overseas markets,” Sonders said.
She added that “international diversification has paid dividends this year” as a result of these fundamental differences.
Looking ahead, Sonders expects the volatile rotation pattern to persist as narratives continue to shift rapidly. While the trading environment remains challenging to navigate, she maintains that the longer-term fundamental supports for wider market participation remain intact beneath the surface turbulence.
