Top funds are rebalancing their portfolios, moving away from Nvidia and increasing their positions in other AI megacaps like Broadcom, Google, Meta, Palantir, and AppLovin.

Institutional Investors Reallocate Capital Within AI Sector, Shifting from Nvidia to Diversified Megacaps

U.S. equities are seeing a notable reallocation of capital within the artificial intelligence (AI) sector, as leading funds strategically reduce their exposure to Nvidia (NVDA) while increasing positions in other AI megacaps, including Broadcom (AVGO), Google (GOOG, GOOGL), Meta (META), Palantir (PLTR), and AppLovin (APP). This rebalancing reflects a broader market recalibration, moving towards a more diversified investment landscape beyond concentrated tech-led growth.

The Event in Detail

Comprehensive Financial Planning Inc. PA decreased its NVIDIA Corporation (NASDAQ:NVDA) holdings by 39.8% during the first quarter, selling 19,319 shares and reducing its total to 29,206 shares. Nvidia now represents 3.1% of their investment portfolio, a notable shift for what was once their sixth-biggest holding. Concurrently, the Invesco QQQ Trust (QQQ), which aims to mirror the performance of the Nasdaq-100 index, shows significant weightings in the favored AI megacaps. Key holdings relevant to this shift include Broadcom Inc. (AVGO) with a 5.36% weight, Meta Platforms, Inc. (META) at 3.69%, Alphabet Inc. (GOOGL) at 2.84% and (GOOG) at 2.67%, Palantir Technologies Inc. (PLTR) at 2.02%, and AppLovin Corporation (APP) at 0.84%.

This capital rotation is part of a larger "great rebalancing" in financial markets, characterized by a move away from the mega-cap technology and AI-driven stocks that have dominated recent years, towards more traditional value and cyclical sectors. This trend has gained considerable momentum throughout 2025.

Evidence of institutional rotation out of Nvidia is further supported by trading volume data and options activity.

"Dark pool trading (off-exchange activity) now accounts for over 50% of NVDA's daily volume, indicating that institutions could be selling without moving the price too much in public markets."

Nvidia has experienced record trading volume on down days, which can be a classic sign of institutional selling, while rallies have seen lower volume, implying a lack of conviction from large buyers. NVDA's biggest single-day drop in August 2024 saw $57.7 billion in dollar volume trade hands, suggesting major institutional activity. Furthermore, bearish positioning in Nvidia's options market has increased, with put/call ratios rising and put open interest now exceeding call open interest. Short interest in NVDA also increased by 5.9% in late 2024, hitting its highest level in over a year.

Prominent investors have also signaled this shift. Stanley Druckenmiller trimmed his NVDA position, and Renaissance Technologies halved its stake in Q2 2024, reducing its exposure from approximately 7 million shares to 3.5 million. Elliott Management notably purchased put options against NVDA, representing an estimated $195 million in downside exposure.

Analysis of Market Reaction

The rebalancing of portfolios is driven by a confluence of factors, including perceived overvaluation in the tech sector, evolving interest rate expectations, and a broadening of economic expansion. The groundwork for this rotation was laid in late 2024, with a pivotal moment arriving in early 2025 with the Federal Reserve's "dovish pivot," signaling potential interest rate cuts. The federal funds rate currently sits in a range of 4.25% to 4.50%, with analysts widely anticipating at least two more cuts (0.50 percentage points) by the end of 2025. Expectations of lower borrowing costs are particularly beneficial for small-cap companies and cyclicals, which often carry higher debt loads and are more sensitive to changes in interest rates.

This divergence has seen tech behemoths experience underperformance while small-cap and cyclical sectors surged. The Russell 2000 small-cap index notably outpaced the tech-heavy Nasdaq 100 in August 2025, climbing over 7.3% in that month alone.

Broader Context & Implications

For several years, a handful of U.S. mega-cap technology companies, often dubbed the "Magnificent Seven" (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA), and Meta Platforms (META)), overwhelmingly dictated market performance, largely fueled by enthusiasm for artificial intelligence. These companies collectively accounted for approximately 21% of the S&P 500's total market capitalization, a stark increase from 12.4% eight years prior. Nvidia's market capitalization soared past $4 trillion by August 2025, making it the largest listed U.S. company, with its data center revenue skyrocketing from $4.2 billion in Q1 2023 to $39.1 billion in Q2 2025.

However, the current "great rebalancing" signifies not just a fleeting trend but a strategic recalibration by investors. As AI capabilities are rapidly adopted across diverse industries—from healthcare to agriculture and manufacturing—its widespread integration is not only enhancing efficiency and reducing costs but also unlocking new avenues for innovation and revenue generation, suggesting that the next wave of market growth will be more widely distributed. U.S. companies are projected to invest over $300 billion in AI in 2025, with nearly 80% indicating plans to increase their AI budgets. The MSCI EAFE Index also gained 12.1% in Q2 2025, outpacing the S&P 500's 10.9% return, as investors flocked to cheaper, earnings-driven opportunities.

Looking Ahead

This rebalancing has immediate implications, fostering increased market volatility and compelling investors to re-evaluate their portfolios for a more robust and sustainable growth trajectory. Cyclical sectors such as financials, industrials, and energy are expected to maintain their outperformance, benefiting from shifts in market sentiment and potential interest rate stabilization or cuts. While some mega-cap tech giants might see a temporary pause or correction, a Federal Reserve rate cut in late 2025 could re-catalyze interest in certain cyclical sectors and rate-sensitive assets. Given the market's heavy concentration, it is prudent to note that

"small hiccups in AI adoption or profitability"

could trigger significant swings for AI megacaps. Key factors to watch in the coming days and weeks include upcoming economic reports, further central bank guidance, and the continued diversification of AI integration across various industries.