A decisive shift in market leadership is underway as investors rotate out of software and into more traditional sectors, including energy, materials and industrials. The move comes as markets place greater weight on earnings durability, margins and cash flow rather than headline revenue growth tied to artificial intelligence.
BNN Bloomberg spoke with Theresa Shutt, chief investment officer at Harbourfront Wealth Management, who said investors are recalibrating expectations around AI spending, rewarding companies tied to infrastructure buildout and penalizing those unable to demonstrate clear returns and pricing power.
Key Takeaways
- Market leadership has rotated away from software and toward industrials, energy, materials and financials despite relatively steady index levels.
- Investors are demanding stronger margins, free cash flow and capital discipline, signalling that revenue growth alone is no longer enough.
- The AI trade is becoming more selective, with hardware, semiconductors and infrastructure providers outperforming software names.
- Software companies face valuation pressure as investors question long-term multiples and the risk of AI-driven margin compression.
- Macro data is taking a back seat to company-specific earnings results, reinforcing a stock pickers’ market driven by earnings quality and sustainability.
Read the full transcript below:
ROGER: As the rotation away from software and tech continues, other segments of the market are starting to gain momentum, with energy and materials seeing an inflow of new investments. For more on this, we’re joined by Theresa Shutt, chief investment officer at Harbourfront Wealth Management. Theresa, thanks, as always, for joining us.
THERESA: Thanks, as always, for having me.
ROGER: Quite a day. It’s a bounce back for the Nasdaq, up 1.33 per cent. Are people having second thoughts, or are we still seeing that rotation?
THERESA: I think we’re still seeing that rotation. Certainly, U.S. stocks have been rocked this month by concerns over AI capex and whatnot. Obviously, we’ve got the FOMC minutes release later today that will give some insight into maybe the outlook going forward under Washington leadership. I think people are looking to that for some sort of signalling. But I do think there is a decisive shift in leadership underway in terms of the market.
Investors are obviously moving away from some tech names, in particular software, and traditional S&P segments — industrials, financials, energy and materials — are gaining fairly strong momentum still. I think it’s really the fact that these traditional companies still provide a haven of earnings reliability. They’re largely insulated from some of the AI-driven margin compression. In fact, they’re really well positioned to benefit from these shifting dynamics. What we’re seeing, I think, is investor preferences being recalibrated.
According to the investment manager index, industrials, energy and basic materials have climbed to the top of the sector rankings, with industrials climbing to the No. 1 spot for the first time in six years. I like to talk about Caterpillar as a prime example of an industrial name that’s returning to favour, not just because of its traditional model. I think it stands out because it’s a prime beneficiary of AI-driven infrastructure growth.
While we talk about capex spend and whatnot — is it too much, is it too little — this company, particularly its construction equipment, is essential for building new data centres, while the power and energy division is thriving by supplying turbines and large reciprocating engines that meet the redundancy needs of these facilities. Its shares over the past month have risen almost 20 per cent. So I think there are some interesting dynamics going on in the market. Markets need to focus less on pricing AI potential and more on pricing AI economics in some of these companies that are benefiting from AI, as well as providing stability and earnings. And the fact that the U.S. administration is investing in the industrial sector and the defence sector — I think this rotation is going to continue.
ROGER: All right. And with the AI economics, are you talking about companies like Caterpillar or companies that are starting to incorporate it?
THERESA: Yeah, both. I think we’re finally starting to talk about the winners and the losers. There was a point where the AI narrative was this all-encompassing force, and that drove all markets higher. Now we’re seeing the selectivity emerge, and we’re seeing that in some earnings reactions, like Cisco and Shopify. Maybe investors are less impressed. Good growth isn’t enough, frankly.
We’re starting to see the market sort the AI trade. I think you’re seeing winners in compute, semiconductors and AI infrastructure — what we’re calling picks and shovels — that is hardware over software. For these players, AI demand is visible, it’s contractual, it’s front-loaded and the revenues are tied to the capacity buildout, not end-user monetization. I think that’s really important.
We’re also seeing the enablers do well — power, natural gas, players such as this — which I think is really interesting. On the loser side, we’re seeing software come under pressure, and that’s really because AI disruption in some of these applications will undermine their moats. People are starting to question these long terminal multiples, not so much near-term growth. Some of the software is essential for mission-critical uses at large organizations, and they’re not going away anytime soon. But I do think there is a shift away from this idea that everything that’s AI is great to maybe we need to think about who’s going to benefit and who’s not, and who’s adopting it quicker and in the most intelligent way.
There’s going to be a risk of AI-washing, as we saw with ESG and greenwashing. We have to be really clear about which companies are actually using it and how it’s affecting their productivity, innovation and margins.
ROGER: And just going back to earnings, is the market being unrealistic with the reaction to some of the results that we’re seeing? Are they going to have to eventually say, you know what, these are really good earnings and the companies are good?
THERESA: Yeah, I think so. What’s interesting is we’re seeing micro and earnings really dominating the headlines. There seems to be a shrugging off of some of the macro data, whether that’s jobs or inflation. People are really focused on how profitable these companies are, without thinking about the longer term.
I think that’s starting to shift. Right now, stock selection is really critical. This is a great time for stock selection. You saw Berkshire Hathaway make some interesting choices and continue to trim Apple. They sold Amazon. They’re buying The New York Times. So I think we’re seeing this at work, where people are starting to look beyond earnings beats and really understand where those earnings are coming from and how sustainable they are.
ROGER: All right, we’ll have to leave it there. Theresa, thank you, as always, for joining us.
THERESA: Thanks, Roger. Thanks for having me.
ROGER: Theresa Shutt, chief investment officer at Harbourfront Wealth Management.
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This BNN Bloomberg summary and transcript of the Feb. 18, 2026 interview with Theresa Shutt are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
