The market has just experienced one of the most significant sector rotations of this bull market, according to strategists tracking the latest moves on Wall Street.

US stocks have once again climbed to record highs, and Wall Street strategists are now seeing signals that massive AI spending is beginning to yield returns — at least for the mega-cap hyperscalers and their rapidly growing cloud businesses. "We are seeing signs that capital investment is starting to convert into profitability," Keith Lerner, Chief Investment Officer at Truist Financial, said in an interview with Yahoo Finance.

Last week, analysts at JPMorgan raised their S&P 500 target from 7,800 to 8,000 points, citing not only strong earnings and upward guidance revisions but also robust demand for cloud computing capacity — as enterprises continue to lease computing power and storage from cloud providers. Microsoft posted record cloud revenue last quarter, with its Azure business surpassing $100 billion in annualized sales for the first time, and the company expects growth to accelerate further this quarter. Amazon.com disclosed that AWS grew at 36.7% in the quarter, its fastest pace in 18 quarters. Alphabet has also seen explosive growth in its cloud segment. Even Meta Platforms, Inc. is exploring leasing out its own computing capacity to external customers.

JPMorgan strategist Dubravko Lakos-Bujas noted that while most hyperscalers still expect negative free cash flow through fiscal 2027, the growth rate of secured backlog is now outpacing the pace of capital expenditure expansion. "This indicates that demand is catching up with the massive capital investment," he said. "It means the speed of commercialization is likely to outpace the expansion of capital spending, supporting accelerated revenue growth ahead while easing concerns about return on investment."

Data from BofA Research shows that the combined long-term backlog of cloud contracts at the four leading cloud service providers has surpassed $2.3 trillion, up 16% from the first quarter. Fulfilling these orders will still require sustained increases in capital investment. The market expects Alphabet, Amazon.com, Microsoft, and Meta Platforms, Inc. to collectively spend approximately $725 billion to $760 billion in capital expenditures this year to build out AI infrastructure.

"I am currently bullish on the cloud computing space. In the AI computing infrastructure wave, after chips and memory, cloud computing capacity will become the next bottleneck that needs to be broken through," said Tom Essaye, founder of research firm Seven Report, in an interview with Yahoo Finance. When asked about stock preferences, he stated: "If I had to rank them, I would choose Alphabet first, then Amazon.com, and then Microsoft." He added that Microsoft's lower ranking stems from weakness in its Office software segment, as the broader software industry faces a slowdown.

Even disappointing earnings from networking giant Cisco and chip company Cerebras last week failed to shake the AI trade. Sylvia Jablonski, Chief Investment Officer at Defiance ETF, commented: "The market has already priced in explosive growth for the AI sector; merely performing well is no longer enough to meet market expectations."

Lerner at Truist believes that technology and AI will remain the core trading themes for the remainder of the year. He advises clients to maintain an overweight position in the technology sector while also allocating to healthcare and financial stocks to balance portfolio volatility.