The AI Trade Rotation: Money Is Moving Out of Chips and Into This

Some investors made a boatload of money throughout much of 2026 by focusing on semiconductors and memory chips. It's no coincidence that the biggest year-to-date winner in the S&P 500 (SNPINDEX: ^GSPC), as well as three of the five top-performing stocks in the index, were semiconductor stocks.

There's also no secret why these stocks have delivered huge gains. Demand from data centers hosting artificial intelligence (AI) systems has surged. But an AI trade rotation appears to be underway now. Money is moving out of chips and into another area.

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Where the money is flowing

The iShares Semiconductor ETF (NASDAQ: SOXX) owns 30 semiconductor stocks. So far this year, the exchange-traded fund (ETF) is up around 80%. However, the fund has fallen by a double-digit percentage over the last seven weeks.

Meanwhile, another iShares ETF is up by a double-digit percentage during the same period. The iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) attempts to track an index of North American software stocks. Its portfolio includes 106 stocks of leading software companies, including Palo Alto Networks (NASDAQ: PANW), Microsoft (NASDAQ: MSFT), and Palantir Technologies (NASDAQ: PLTR).

Why have software stocks become hotter recently while chip stocks have cooled off? One possibility is that investors are shifting their attention to companies that will use AI to make money and focusing less on the companies making the hardware required to run AI apps.

Another potential explanation is valuation. After the tremendous gains during the first half of 2026, some chip stocks have become somewhat pricey. For example, Intel (NASDAQ: INTC) now trades at 79 times forward earnings after its shares soared more than 170% year to date.

It's a different story for many software stocks, particularly software-as-a-service (SaaS) stocks. Investors sold these stocks hand over fist earlier this year on fears that AI would disrupt their business models. This so-called "SaaSpocalypse" has made many SaaS stocks look cheap historically.

Cash in the chips?

Some investors may be tempted to take profits on semiconductor stocks in their portfolios to hop on the AI rotation bandwagon. However, that could be a mistake.

Importantly, many AI chip stocks continue to deliver exceptional earnings growth. The demand that's serving as a tailwind for these stocks doesn't seem likely to wane anytime soon.

Also, while some chip stocks are priced at a premium, others still sport attractive valuations (especially with growth prospects factored in). For example, Nvidia's (NASDAQ: NVDA) forward earnings multiple is a reasonable 22.9, with a low price-to-earnings-to-growth (PEG) ratio based on five-year earnings growth projections of only 0.55.

Finally, it's probably too soon to know for sure if the rotation from chip stocks to software stocks has legs. The recent trajectories for each group might reverse in the coming weeks.

Investors could be better off playing both sides of the AI trade. Buying the iShares Semiconductor ETF and the iShares Expanded Tech-Software ETF should be good ways to do so.

Keith Speights has positions in Microsoft. The Motley Fool has positions in and recommends Intel, Microsoft, Nvidia, Palantir Technologies, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.