The “New Economy” seems to have an age-old ball and chain bound to its leg – the “Old Economy.”

The “New Economy” seems to have an age-old ball and chain bound to its leg – the “Old Economy.” The development of AI software and the hardware, semiconductors, needed to run that software were the initial beneficiaries of increased demand as investors thought of the possibilities of rapidly progressing technology. In the mania around AI, one important thing was seemingly forgotten, the infrastructure necessary to build out what was needed for AI’s scale. Companies have quickly realized the amount of spending necessary to make their AI dreams a reality. Microsoft, Alphabet, Amazon, and Meta are projected to combine for over $600 billion in artificial intelligence investments in 2026 (Yahoo Finance). The economic reality of the AI buildout is that it is going to be expensive and reduce the financial flexibility of many large tech companies. Large cash balances and strong free cash flows were a couple of the supporting arguments for mega-cap technology names’ lofty valuations, but that has taken a hit as these companies must now spend this cash and even take on extra debt to now meet their forward AI expectations at the expense of share buybacks and elasticity.

The building out of data centers, semiconductor plants, and energy infrastructure has led this money to flow from the “New Economy” sectors into the “Old Economy” sectors. The best-performing SPDR sector funds are energy (XLE), industrials (XLI), and basic materials (XLB). All three gained more than 10% year-to-date with XLE leading the pack up nearly 20%. On the other hand, financials (XLF), communication services (XLC), technology (XLK), and consumer cyclical (XLY) are the only four sectors down this year, albeit none are down more the 3% year-to-date. The dispersion in performance has led to sector rankings and signal counts in DALI making notable changes. Energy entered the year ranked ninth but has gained 58 signals and is now ranked fourth. Industrials and basic materials were doing well entering the year but now make up the top two ranked sectors, respectively. On the other side of the coin, technology fell from the top-ranked sector down to fifth, the starkest drop in any sector. While the tech behind AI will still be the spearhead, the buildout necessary to support such ventures will require the “Old Economy” in a way potentially not seen in decades.