Investors Shift to Cheap, Small-Cap Stocks as Risk Aversion Hits Tech Sector – AI Bubble Concerns Rise

Investors Shift to Cheap, Small-Cap Stocks as Risk Aversion Hits Tech Sector

At the start of February 2026, global financial markets witnessed a clear and significant shift. Investors who had been heavily focused on large, high-priced technology companies over the past few years are gradually moving away from these stocks and turning their attention to cheaper, smaller-cap, and lower-valuation companies. This trend is primarily driven by risk aversion, as investors become cautious about assets with high volatility and uncertain returns.

Over the past year, major technology stocks, particularly those tied to artificial intelligence (AI) and cloud computing, experienced extraordinary growth. Prominent names like Microsoft, Nvidia, Alphabet and Amazon reached historic highs, pushing market valuations to around or above $1 trillion. However, investors are now questioning whether these prices reflect the companies’ actual earnings and profitability, or are simply the result of market hype and elevated expectations. This reassessment has triggered a shift toward smaller and more affordable stocks.

Data confirms this changing trend. In the first week of February, the Nasdaq 100 Index, heavily weighted with large tech stocks, fell by nearly 2.8%, while the Russell 2000 Index, which tracks smaller companies, gained 3.5%. In a single week, approximately $45 billion flowed into Russell 2000 stocks, while the combined market value of major tech companies declined by roughly $900 billion to $1 trillion.

A key factor behind this cautious approach in the tech sector is rising costs. Major companies spent nearly $320 billion in 2025 on AI and data center infrastructure, with estimates for 2026 reaching $360 billion. Despite these massive investments, there is a risk that short-term profitability may underperform expectations.

Meanwhile, investors are increasingly focusing on economically sensitive and stable sectors. Mid-sized energy companies have seen gains of 10–18% since the start of the year. Industrial companies with strong cash flow have outperformed the market average, while healthcare stocks have recorded 6–9% growth. Similarly, small and low-priced companies in basic materials and commodities sectors have delivered significant returns.

Value stocks are now being prioritized, with average price-to-earnings (P/E) ratios of 12–14, compared to 25–30 for large tech companies. This reflects a market where investors are increasingly balancing short-term gains with capital protection.

Experts note that this trend is not merely temporary but signals a deeper shift in investor psychology. With high global interest rates, persistent inflation concerns, and geopolitical uncertainty, investors are seeking companies with low debt, stable earnings, and realistic valuations.

This trend is not limited to the U.S. In Europe, indices tracking small and mid-cap stocks have outperformed by an average of 4% since January, while in Asia, investors are also favoring industrial and energy sectors over high-priced tech stocks. Globally, value and small-cap stocks are gaining prominence, reshaping investment strategies.

The Future of AI and Bubble Risks

Artificial Intelligence (AI) is currently attracting unprecedented attention in global financial markets. Rapid development in AI applications, automated systems, and advanced chatbots has heightened investor expectations. Analysts project that AI-related investments could reach nearly $2 trillion globally in the next five years, positioning the sector as a critical driver of economic growth.

However, experts caution that a potential AI bubble may be forming. History offers lessons from the 2000 Dot-Com Bubble, when tech stocks, both large and small, became grossly overvalued, leading to a market correction that wiped out nearly 78% of tech stock value between 2000–2002. Similarly, several AI stocks today carry P/E ratios of 40–50, levels considered risky by financial standards. If expectations fail to materialize, the market could face significant corrections.

Despite these risks, the fundamentals of AI remain strong. Real-world AI applications in healthcare, autonomous vehicles, data analytics, and industrial automation are expected to drive long-term economic value. The main risk lies in overhyped valuations and unrealistic expectations, not in the underlying technology or business models. As a result, investors are focusing on smaller, stable, and reasonably priced AI companies to limit risk while preserving growth potential.

Conclusion

As of February 2026, global markets are entering a phase where investment focus is no longer solely on high-growth tech. Instead, investors are prioritizing value, stability, balanced risk, and cautious AI investments. Small and cheap companies are increasingly taking the lead, while large tech and overvalued AI stocks must reassess their strategies. Investors now emphasize profit, capital protection, realistic valuations, and the sustainability of AI fundamentals, marking this period as one of the most important turning points in modern market behavior.