Why the Best Time to Buy Artificial Intelligence (AI) Growth Stocks Is When Everyone Else Is Rotating Out of Tech

The artificial intelligence (AI) megatrend has been the primary driver of an incredible bull market over the three or so years. That should be no surprise to most investors, particularly those who have seen their investments in AI juggernauts like Nvidia (NASDAQ: NVDA) go through the roof.

But these stocks hit a wall late last year and spent the first quarter of 2026 mostly going backward. There were several reasons why AI-related stocks in particular lost ground, starting with their valuations.

After more than three years of surging returns, they were trading at incredible premiums based on standard metrics like the price-to-earnings ratios (P/E), which gauges of how expensive a stock is relative to the company's actual profits.

When markets are strong and the economy is good, investors tend to be less concerned about P/E ratios because companies are doing well and earnings are skyrocketing.

Image source: Getty Images.

The danger comes when the economy starts to sputter, as it has more noticeably in recent months. When inflation rises, cuts in interest rates stop, and growth stagnates, investors become concerned that companies won't be able to churn out huge earnings or maintain rapid earnings growth. Moreover, when it came to AI companies in particular, investors' worries intensified about the enormous amounts that they were spending on building new infrastructure and developing new capabilities.

While that flood of capex spending was viewed largely as a positive for AI stocks during the bull market, it became something to worry about during the correction, as shareholders expressed concerns that the companies' spending might not pay off and could instead become a drag on their earnings.

Rotation nation

These were two broad reasons AI stocks tanked in late 2025 and the first quarter of 2026. During that period, investors broadly rotated out of AI stocks and into more stable alternatives like value stocks and dividend stocks.

Such assets are considered relative safe havens. They are stocks of established companies with histories of performing well even in down markets and generating consistent dividends.

The Iran war, which began on Feb. 28, has brought an added level of uncertainty to the markets and the economy. In late March, the Nasdaq Composite entered a correction -- defined as a drop of 10% or more -- and was down by about 11% year to date as of March 30.

But tech stocks seemed to bottom out at the end of March and have been moving higher. Since April 1, the Nasdaq Composite has gained about 13% and is now in positive territory for the year, up about 4.7%. Much of that bounce stemmed from a temporary easing of tensions between Iran and the U.S., although where things will go from here on the geopolitical front remain very uncertain.

Game-changing technology

Meanwhile, investors seem to be jumping back into AI stocks. The P/E ratios of top AI stocks like Nvidia, Microsoft (NASDAQ: MSFT), Micron (NASDAQ: MU), and Amazon (NASDAQ: AMZN) had plummeted to recent lows, giving investors an opportunity to dive back in at lower valuations.

Asit Sharma, a senior investment analyst at The Motley Fool specializing in AI stocks and the tech sector, told USA Today:

I think most investors view AI as transformative, game-changing technology. Investors, after being aware of this [AI bubble] risk, are deciding to invest for the long term. They're confident that the technology itself is going to produce value.

Ultimately, with many of the most prominent AI stocks, it's not a question of the companies losing their earnings power or utility. In fact, we are only scratching the surface of how AI will transform businesses. The recent correction was more about the investor euphoria that drove valuations to ridiculously high levels. As a result, many decided to cash out and take some profits.

But now that valuations are back down in normal ranges, or even lower than normal, smart investors are looking for opportunities to buy back into AI stocks.

However, they should be cautious. While the AI trend remains the driving force for the economy and markets, not all such stocks are the same. Look for companies with not just revenue, but also earnings, and ones that are dominant players in their niche or industry. Above all, look for AI stocks that have seen their valuations drop back to normal levels.

Rotating some money out of technology and AI stocks after a run-up in the sector is a good strategy for rebalancing a diversified portfolio. However, that marketwide rotation is also providing an excellent opportunity to shift some funds back into AI juggernauts.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.