The Great Rotation: Why Hedge Funds Are Abandoning Tech Titans and Embracing China and AI

The era of unchecked growth for the “Magnificent 7” tech giants—Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla—is over. Hedge funds, once intoxicated by the promise of perpetual tech dominance, are now executing a strategic pivot toward healthcare, communications, and China-exposed equities. This shift, driven by geopolitical tensions, regulatory headwinds, and the maturation of AI adoption, is reshaping investment portfolios. Let’s dissect why this rotation is happening—and how to capitalize on it.

The Geopolitical and Policy Drivers of the Shift

President Trump’s aggressive trade policies—threatening tariffs on Chinese imports and pushing for tech decoupling—have created a “new normal” of supply chain uncertainty. The Magnificent 7, heavily reliant on Chinese manufacturing and global data flows, face rising costs and regulatory scrutiny. Meanwhile, sectors like healthcare (e.g., CVS Health, up 50% YTD) and domestic infrastructure (e.g., energy pipelines) are emerging as safer bets amid protectionism.

The Roundhill Magnificent Seven ETF (MAGS) has plummeted 15% year-to-date, underperforming the S&P 500 by nearly 20 percentage points. This stark divergence underscores investor skepticism about tech’s ability to sustain its prior growth rates.

The Tech Overvaluation Problem

While the Mag-7’s earnings growth has slowed to 18.5% (down from 31.7% in late 2024), their valuations remain stubbornly high. NVIDIA’s P/S ratio of 29x—nearly triple Microsoft’s—hints at stretched expectations for AI infrastructure demand. Tesla’s 44% YTD drop, despite its EV dominance, signals that even darlings of the sector can’t escape valuation gravity.

Where Hedge Funds Are Allocating Instead

1. Phase 3 AI Adopters: From Infrastructure to Services

The shift is away from hardware and cloud infrastructure (NVIDIA, AWS) and toward companies integrating AI into customer-facing services.
- Salesforce (CRM): Its Einstein AI platform is boosting enterprise software adoption, with 2025 revenue growth projected at 18%—exceeding its cloud peers.
- Now (NOW): This industrial supply chain leader uses AI for predictive maintenance, driving a 22% revenue surge in Q1 2025.

2. Deregulation Plays: Energy and Utilities

Trump’s push to streamline permitting for energy projects has fueled demand for infrastructure stocks.
- Williams Companies (WMB): Its Transcontinental Pipeline expansion, greenlit under deregulation, could boost EBITDA by $500 million annually.
- Southwest Gas (SWX): A beneficiary of federal subsidies for rural energy projects, its dividend yield of 3.2% offers stability in volatile markets.

3. China Reversals: Betting on a Policy Pivot

While U.S. tariffs loom, Chinese equities have become oversold. The Shanghai Composite is down 12% YTD despite improving manufacturing data.
- iShares MSCI China ETF (MCHI): A 12% discount to its 5-year average P/E ratio makes this a contrarian play on normalization of U.S.-China trade.
- Tencent Music (TME): Its 50% decline in 2025 offers a chance to buy into China’s tech rebound, as AI-driven content platforms gain traction.

The Risks of Sticking with Tech

• Margin Pressures: Rising talent costs and compliance expenses are eroding profits. Microsoft’s cloud gross margins fell to 58% in Q1 2025 from 65% two years ago.
• Regulatory Uncertainty: The DOJ’s antitrust case against Google (Alphabet) and Meta’s EU data fines highlight how litigation could cap upside.

Actionable Investment Strategy

• Buy Phase 3 AI Adopters: CRM and NOW offer growth at reasonable valuations (P/S ratios of 6.5x and 4.2x, respectively).
• Add Deregulation Plays: WMB and SF provide yield and exposure to U.S. energy resilience.
• Dip into China: MCHI and TME offer asymmetric upside if trade tensions ease.
• Avoid Overvalued Tech: Stick with only Tesla (despite its struggles) for its EV leadership—others like NVIDIA and Meta are better for shorting.

Conclusion: Pivot or Perish

The Mag-7’s dominance is fading, and investors clinging to their FAANG-era logic risk being left behind. The future belongs to companies leveraging AI in service-driven models, benefiting from deregulation, or positioned to rebound from China’s undervaluation. This isn’t just a sector rotation—it’s a generational reallocation toward resilience and policy alignment. Act now, before the shift becomes consensus.

The writing is on the wall: Tech’s golden age is over. The next era will be defined by smart pivots—and those who act fastest will win.

Data as of May 2025. Past performance does not guarantee future results. Consult your financial advisor before making investment decisions.