By Martin Baccardax

The stock market is broadening beyond tech as investors look for new market leadership into the summer months and over the back half of the year.

Healthcare, industrials, and financials are the market's three leading sectors over the past month as investors execute a quiet rotation out of tech and artificial intelligence names.

Each of the three major tech sectors, in fact, is in the red this month, with communications services falling 8.1% amid a 12%-plus slide for the Magnificent Seven. Nearly every stock in the cohort, in fact, has fallen at least 10% from their recent highs, with Apple just barely avoiding correction with a 9.9% slide into last Friday's close.

The PHLX Semiconductor index, meanwhile, fell 8.1% last week following an 8.6% gain recorded over the prior week that included a new one-year high for the chip sector benchmark. Big volumes were seen in Micron Technology, which posted better-than-expected earnings last Wednesday but slipped 0.15% for the week.

"Rotation is happening and leadership is shifting," said Jonathan Krinsky, managing director and chief market technician at BTIG . "All of this suggests to us that the semi/AI trade still has meaningful downside, but money continues to find other places within equities and for now we would embrace that rotation."

Bank of America's weekly Flow Show report, published Friday, indicated a similar trend. Record outflows from tech stocks of around $9.3 billion were recorded over the week, with the first overall outflow from U.S. stocks since March.

The question for investors now is whether the current rotation points to a healthier mix for stocks over the back half of the year, or suggests a quiet concern for both the tech sector's first half dominance and the risks tied to growth and inflation that are building into the second half of the year.

This is especially true given last week's worrying market slide, which saw a 4.6% decline for the tech-focused Nasdaq Composite and a nearly 2% decline for the broader S&P 500.

However, Mark Hackett, chief market strategist for Nationwide, thinks the market is telling a more supportive story.

"Rather than the start of a major downturn, this looks more like a period of consolidation beneath the surface," he said. "The fundamental backdrop remains supportive, with consumers still spending, businesses investing, and earnings expectations continuing to move higher.

That view was echoed by RBC Capital Markets, which lifted its 12-month price target for the S&P 500 by just over 3%, taking it to 8150 points.

"The stock market deserves to move higher over the next year from a variety of perspectives," said Lori Calvasina, the bank's head of U.S. equity strategy, citing earnings, a solid growth backdrop and a likely supportive Federal Reserve.

That said, she remains focused on AI risks, earnings forecasts and developments in Fed policy, and cautions that "the path for stocks will not necessarily be a linear one."

That focus will likely prove key if the current rotation deepens over the summer months as bond yields rise and inflation pressure percolate.

That could stoke market volatility gauges over the coming months, especially under the Fed's new leadership of Chairman Kevin Warsh, who prefers a tighter communication policy with fewer market signals.

"We believe the market volatility seen so far in June is the tip of the iceberg," said David Laut, chief investment officer at Kerux Financial in Granite Bay, Calif., who sees a broader market correction looming.

"Conditions are ripe for one amid elevated valuations, continued geopolitical uncertainty, and low summer trading volume," he added. "Staying underweight technology stocks is the name of the game for now."

Write to Martin Baccardax at martin.baccardax@barrons.com

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