Why Three Undersung Stocks Outpace AI Darlings in Mutual Fund Demand

The past two years have been defined by a seismic shift in capital allocation, with artificial intelligence (AI) stocks dominating headlines and investor sentiment. Yet beneath this frenzy, a quieter but equally significant trend has emerged: mutual funds are increasingly favoring traditional sector plays like Banco Santander (SAN), ePlus (PLUS), and AAR Corp (AIR) over high-profile AI darlings such as Google (Alphabet) and Palantir Technologies (PLTR). This divergence reflects a recalibration of risk, valuation discipline, and macroeconomic realities that investors must now navigate.

The AI Bubble and Its Limits

By 2025, the AI sector had become a crowded trade, with mutual funds and ETFs pouring capital into large-cap tech stocks and AI infrastructure providers. According to a report by Santander, the Information Technology and Communication Services sectors became dominant drivers of equity earnings growth, fueled by semiconductor and cloud computing demand. However, this momentum hit turbulence as regulatory uncertainties-particularly around tariffs- triggered a sharp correction in AI stocks. Palantir, for instance, surged 193% in 2025 but now trades at a price-to-sales multiple of 109.9, raising concerns about overvaluation and volatility.

Meanwhile, top mutual funds like the American Funds Growth Fund of America and Fidelity Contrafund have diversified their AI-heavy portfolios by adding traditional sector names. These funds now hold significant stakes in Banco Santander, ePlus, and AAR Corp, signaling a strategic pivot toward sectors less exposed to AI's regulatory and valuation risks.

The Case for Traditional Sectors

Banco Santander, a Spanish banking giant, has seen its mutual fund holdings grow substantially. 13F filings reveal that its portfolio value increased from $8.46 million in Q4 2023 to $11.26 million by Q3 2025. This growth aligns with broader market trends: as U.S. monetary easing and deregulation boosted cyclical sectors like banking and industrials, investors sought out stocks with more predictable cash flows and lower volatility.

ePlus, a technology solutions provider, and AAR Corp, an aerospace and defense services company, have similarly attracted attention. These firms operate in sectors that benefit from long-term secular trends-such as defense spending and infrastructure modernization-while avoiding the speculative overhang of AI. For example, AAR Corp's exposure to defense contracts and ePlus's role in enterprise IT services position them to capitalize on stable, recurring revenue streams.

The ETF Revolution and Active Strategies

The shift toward traditional sectors is also tied to broader changes in fund management. ETFs have outpaced mutual funds in advisor allocations, with active ETFs now accounting for 29% of total ETF assets in 2025. This trend reflects a preference for liquidity and transparency, particularly in volatile markets. While AI stocks remain a core holding for many funds, the inclusion of traditional sector plays like Santander and AAR Corp underscores a more balanced approach to risk management.

Implications for Investors

For investors, the key takeaway is clear: while AI will remain a transformative force, the overconcentration in high-growth, high-valuation stocks has created vulnerabilities. The underdog stocks-Santander, ePlus, and AAR Corp-offer a counterbalance. They provide exposure to sectors that are less susceptible to regulatory shocks and more aligned with macroeconomic tailwinds like monetary easing and infrastructure spending.

As one analyst noted, "The next wave of growth won't come from a single sector but from a mosaic of industries adapting to a post-AI correction world." For mutual funds and individual investors alike, the lesson is to diversify beyond the AI hype and seek value in the overlooked.