Wall Street rotates from AI into 5 defensive names, Cramer says

Wall Street is rotating from AI infrastructure into defensive growth names, CNBC's Jim Cramer said, citing Costco, Walmart, ServiceNow, Salesforce and Johnson & Johnson.

"Investors are moving away from some of the market's biggest AI infrastructure winners and into companies with growth drivers outside the data center buildout," Cramer said on CNBC's Squawk on the Street.

The call comes as AI-related stocks face mounting pressure. The Nasdaq Composite fell more than 1% in premarket trading Tuesday, tracking an overnight 10.8% crash in South Korea's KOSPI index that hit memory and semiconductor names. The Cboe Volatility Index closed at 18.58 on July 24, up from about 14.50 two weeks earlier, reflecting growing unease in tech-heavy portfolios.

The rotation marks a potential inflection point for a market dominated by AI-related capital spending since late 2024. With hyperscalers committing roughly $725 billion in combined AI infrastructure spending for 2026, investors are questioning whether those investments will generate returns fast enough to justify stretched valuations in semiconductor and data center stocks.

The shift has been building for months. Goldman Sachs data showed hedge funds trimmed tech hardware exposure for four straight weeks heading into July. Chip stock volatility hit a 30-year high relative to the broader market, according to data cited by Cramer, making the trade increasingly difficult to hold for leveraged investors.

Nvidia, the bellwether of the AI trade, posted Q1 fiscal 2027 revenue of $81.6 billion, up 85% year over year, yet its shares have been volatile. Advanced Micro Devices trades at a price-to-earnings ratio of 186 after Q1 revenue of $10.25 billion. Super Micro Computer missed consensus revenue by 18% in its most recent quarter and carries $8.8 billion in debt. Even strong earnings have failed to lift share prices: TSMC raised its 2026 capex outlook in mid-July and the stock fell anyway.

The stocks Cramer highlighted span consumer staples, healthcare and enterprise software — sectors that offer earnings visibility without direct exposure to data center spending. Costco and Walmart benefit from steady consumer demand and pricing power in an environment where household spending remains resilient. ServiceNow and Salesforce provide recurring subscription revenue tied to enterprise digitization, a trend that predates the AI boom and continues regardless of data center investment cycles. Johnson & Johnson offers healthcare exposure with a diversified pharmaceutical and medical devices business that generates consistent cash flow across economic cycles.

The rotation mirrors a pattern that emerged in late June, when the Dow Jones Industrial Average hit a record 52,615 on the same day Nvidia and Apple fell 2% to 5%. Nine of 11 S&P 500 sectors rose or held steady that session, even as tech names sold off. Cramer has been warning about leveraged AI exposure for weeks, telling investors on his July 27 Mad Money show to sell leveraged positions "no matter what" at the market open.

For portfolio managers, the question is whether this rotation represents a tactical shift or the start of a longer-term trend. Banking earnings have been strong — JPMorgan posted a 33% earnings beat in Q2 with equity markets revenue surging 86% year over year — while industrial names like J.B. Hunt have gained 50% year to date. The data supporting a move into non-tech sectors is accumulating, even as AI infrastructure spending remains at record levels. Cramer's track record on sector calls is mixed, but the underlying earnings momentum in financials and industrials provides a fundamental basis for the rotation that extends beyond any single commentator's opinion.

This article is for informational purposes only and does not constitute investment advice.