This week’s

big stock-market

AI sell-off scared lots of investors. Of course, it did. Many investors have been loading up on technology stocks and the

artificial intelligence frenzy

has taken over Wall Street, and to a lesser extent Bay Street. With all the interest, the

S&P 500 index’s

technology weighting is now at a hefty 35.8 per cent. This is the largest concentration ever of a single sector within the S&P 500 historically, surpassing other major sectors such as financials and health care that have previously ranged between 13 to 20 per cent.

But if you have

loaded up on technology

there are going to be some painful days when the market corrects. Some stocks on Tuesday saw declines of 15 per cent or more. Investors fretted because in nearly all cases there was no “bad” news. In fact,

many companies in the tech sector

reported very strong earnings over the past week. It was just that expectations ran ahead of reality. Also, profit-taking can happen any time, especially as we approach year-end. It has, for nearly every investor, been a great year in the market. Why not take some money off the table and get ready to enjoy all those holiday parties about to hit your calendar?

So, for those so inclined, let’s take a look at some

alternatives to technology

. We are not calling for a top in the mega-cap tech sector, but it’s always good to diversify and to know what else is out there for your investment capital.

Energy stocks

Last month’s takeover battle for MEG Energy Corp., and this week’s bid for NuVista Energy Ltd. could be telling: If investors do not price

energy sector stocks

correctly then corporate buyers will step in. Even with these corporate buyers paying a premium, they can still make lots of money by buying undervalued energy companies. For years now the energy sector has struggled. In the S&P 500, energy now stands at just 2.7 percent of the index. It is much higher on the TSX, at 15.4 percent. However, many investors we talk to just cannot stand the sector. The pain of 2020, when oil prices actually went negative, is very much present. But while investors were not paying attention, energy companies started paying down debt, paying nice dividends and buying back their stock. This has brought valuations to very reasonable levels and financial risk is lower to boot. So, for those investors rethinking their massive technology exposure, energy might be a good place to look for ideas.

Large cap dividend stocks

Yes, we know. A four per cent dividend stock sounds pretty dull when compared with companies such as AI darling Palantir Technologies Inc., which is still up about 150 percent this year. But in a market correction, a four per cent dividend might look a lot better than a 50 per cent stock decline elsewhere. Companies such as Enbridge Inc. (5.8 per cent yield) or Fortis Inc. (3.6 per cent yield) might see a lot more interest if the tech and other sectors decline. Investors in large-cap dividend stocks can also benefit if interest rates continue to fall, which would make their dividends even more attractive in comparison to fixed-income alternatives.

Gold bullion and gold stocks

Sure, the

gold sector

has had a giant run this year, on the back of a weak U.S. dollar, lower inflation, and the prospect of lower rates. Central bank buying (with the exception of the Bank of Canada) has also helped fuel the fire in the sector. Will the gold sector keep running? No one really knows, but currency debasement and lower rates are typically very positive for gold. Gold is also seen as good insurance against general financial calamities. Tech sector investors who are diversifying might want to take a look.

Small cap stocks

With trillions of dollars pouring into the mega-cap AI companies, many smaller companies have been left behind. They don’t have the budgets to compete with the big players. But many have solid earnings, solid products and good prospects. However, valuation gaps have changed dramatically. Large-cap companies can trade at 100 times’ sales. Small-cap companies can trade at 15 times’ earnings. At some point, two things are likely to happen. One, investors will realize that small and medium capitalization companies are much cheaper, and capital could flow to the sector, resulting in improved investment performance. Or, larger companies, seeing the valuation gap, will start buying up the smaller companies. We all know that the giant tech companies will likely get blocked by the government if they try to buy large companies in a bid to further dominate their sectors. But they might be allowed to buy some small companies to expand their product and customer base. A large company could “sneak in” a nice acquisition of a small company without too much antitrust notice. The big differences in valuation could make this a good move for the large companies, and small-cap tech stocks could see incremental benefit.

Real estate and REITS

Yes, we know what you are thinking. Doesn’t the

real estate sector

simply look horrible right now? Well, yes, sort of, it does. But true contrarian investing — by design — requires going against the grain. Low occupancy levels, condo over-building, lower immigration: all of these are issues stacking up against real estate as an investment. But if investors are seeking alternatives to tech, and worried about valuations, then hard assets such as gold and real estate can certainly help offset volatility elsewhere in a portfolio. Real estate is also woefully under-represented in the markets of both the United States and Canada: It is 1.6 per cent of the TSX Composite and just 1.9 per cent of the S&P 500. With such small representation, it doesn’t take a lot of money to move the needle and, potentially, see big moves if investors start to rotate into the sector.

  • Timothy Wu on how Canada can take on U.S. Big Tech and thrive in the age of monopoly
  • Louis Têtu: Why Canada has to get artificial intelligence right

Peter Hodson, CFA, is founder of 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

If you like this story,
sign up for
the FP Investor Newsletter.