Is 2026 the Year to Rebalance From AI-Centric Growth to Undervalued Sectors?

The AI-driven equity rally of 2025 has left a mixed legacy: while it fueled extraordinary gains in semiconductor and tech stocks, it also inflated valuations to levels that now appear unsustainable. As investors enter 2026, the question is no longer whether AI will reshape the economy, but whether the market has priced in its long-term potential. With profit-taking evident in late 2025, a valuation normalization underway, and macroeconomic forces shifting, the case for rebalancing toward undervalued sectors-and even safe-haven assets like gold-is gaining urgency.

The AI Sector's Valuation Reset: A Tale of Two Halves

The AI sector's 2025 performance was a rollercoaster. NVIDIA's dominance-reported $57 billion in Q3 revenue and 53% profit margins-highlighted the sector's profitability, but broader market enthusiasm began to wane as investors grew wary of speculative overreach. The Philadelphia Semiconductor Index (SOX) fell 5.6% from its Q3 2025 peak, reflecting a "CapEx fatigue" as companies questioned whether AI infrastructure spending could justify returns. This shift marked the end of the speculative phase and the start of a fundamentals-driven era.

Profit-taking in late 2025 further underscored the sector's bifurcation. Micron Technology, for instance, saw a 2.3% drop in its stock price despite reporting $4.78 earnings per share-$1.01 above expectations. Such volatility signaled that investors were no longer willing to overlook near-term execution risks. Meanwhile, companies like Alphabet (GOOGL) and those with "Agentic AI" roadmaps retained favor, while slower-to-monetize players like Meta (META) faced skepticism.

Gold's Resurgence: A Hedge Against AI's Volatility

As AI valuations normalized, gold emerged as a compelling alternative. J.P. Morgan forecasts gold prices to reach $5,000/oz by Q4 2026, driven by central bank demand (projected at 585 tonnes per quarter) and a weaker U.S. dollar. Goldman Sachs Research echoes this, predicting a 6% rise in gold prices by mid-2026, with structural demand from emerging markets and geopolitical uncertainties reinforcing its safe-haven appeal.

The Federal Reserve's rate trajectory is a critical factor. With the Fed expected to ease rates in 2026, gold-which thrives in low-rate environments-stands to benefit. This dynamic is particularly relevant if AI-driven sectors face a correction, as investors may rotate into gold as a diversifier. Morgan Stanley's $4,500/oz forecast for mid-2026 further underscores gold's role in a 2026 portfolio rebalancing.

Value Sectors: The Quiet Winners of 2025

While AI stocks dominated headlines, value sectors quietly outperformed. The iShares Core S&P U.S. Value ETF (IUSV) delivered a 13.70% year-to-date return in Q4 2025, outpacing the Vanguard Value ETF (VTV)'s 11.26% return. These gains reflect a broader rotation into undervalued equities, particularly in energy, materials, and industrials-sectors poised to benefit from AI's infrastructure demands.

Energy ETFs, for example, gained traction as AI-driven data centers increased demand for power and copper. Similarly, financials like the Invesco KBW Bank ETF (KBWB) outperformed, buoyed by falling rates and strong earnings. Global equities also attracted capital, with ETFs offering more attractive valuations than their U.S. counterparts.

The Fed's Role in 2026's Sector Rotation

The Federal Reserve's policy path will be pivotal in 2026. A shift toward rate cuts-widely anticipated by late 2026-could further weaken the dollar, boosting gold and value sectors while pressuring AI stocks reliant on high borrowing costs. Fidelity analysts note that falling rates could enhance the appeal of energy and materials ETFs, as well as global equities.

Moreover, the Fed's stance on inflation will influence AI infrastructure spending. If reflationary pressures ease, capital-intensive sectors like semiconductors may regain traction. However, given the "CapEx fatigue" observed in late 2025, a more measured approach to AI investments seems likely.

Strategic Rebalancing: A 2026 Playbook

For investors, the case for rebalancing is clear. A diversified portfolio in 2026 should include:
1. Gold ETFs: To hedge against macroeconomic risks and AI sector volatility.
2. Value Sector ETFs: To capitalize on undervalued equities in energy, materials, and industrials.
3. Global Equities: To access more attractive valuations and diversify away from U.S. tech-centricity.
4. Selective AI Exposure: Retaining exposure to high-margin players like NVIDIA, but with reduced weight.

The data supports this approach. With gold projected to rise 6% by mid-2026, value ETFs like IUSV and VTV showing strong inflows, and AI-focused ETFs facing profit-taking pressures, 2026 presents a unique opportunity to reallocate capital toward safer, more resilient assets.

Conclusion

The AI-driven rally of 2025 has reached a critical inflection point. While the sector's long-term potential remains intact, its valuations now reflect a level of optimism that may not be justified by near-term fundamentals. As gold and value sectors gain traction, and the Fed's policy pivot looms, 2026 is shaping up to be the year of strategic rebalancing. Investors who act decisively can position themselves to weather volatility while capturing the next wave of growth.