U.S. stocks ended the week lower, with the Dow down 0.34%, S&P 500 falling 1.09%, Nasdaq losing 2.14%, and Russell 2000 dropping 1.66%. Technology once again led the decline. Semiconductors, memory, software and networking stocks were broadly weaker, while defensive areas such as utilities, consumer staples and pharmaceuticals held up better.
The semiconductor index has now fallen for eight consecutive sessions, its longest losing streak since 2006, and is down more than 15% over that stretch. Meanwhile, WTI crude rose 2.6%, its seventh consecutive daily gain, pushing oil back toward $100 per barrel.
The AI Trade Is Going Through a Major Reassessment
The biggest story of the week was the sharp reversal in AI-related stocks. Importantly, there hasn’t been one major piece of bad news driving the selloff. Instead, investors appear to be reassessing a collection of concerns that have been building for weeks: high valuations, enormous financing needs, increasing competition, questions about AI profitability and uncertainty over how quickly companies can earn attractive returns on the billions being invested.
Anthropic provided another example this week. The company reportedly generated $16.8 billion in third-quarter revenue, up significantly from the previous quarter. Yet some prospective investors are discussing a lower valuation for its expected IPO because growth didn’t meet the exceptionally high expectations that had already been built into the story.
That captures the current challenge for AI stocks remarkably well. Strong growth may no longer be enough when investors have already priced in extraordinary growth.
Strong AI Demand Hasn’t Disappeared
The other side of the story is equally important. There has been little evidence this week that the underlying AI investment cycle is collapsing. ASML raised its sales outlook and said demand is strong enough that it may need additional manufacturing capacity. TSMC also highlighted continued strong demand.
Companies are still scrambling for computing capacity, data centers and power. So this week’s selloff looks less like the end of the AI boom and more like the market becoming more selective about who benefits from it. Investors are increasingly distinguishing between companies selling essential equipment into the buildout and companies taking on substantial debt to finance infrastructure.
That is why heavily financed AI infrastructure companies such as CoreWeave have received so much attention recently. The next phase of the AI trade may therefore depend less on simply demonstrating demand and more on demonstrating profitable demand.
The Broader Market Is Holding Up Better Than Tech
There’s another important development underneath this week’s selloff. The equal-weighted S&P 500, which gives every company roughly the same importance rather than allowing the largest technology companies to dominate, outperformed the traditional S&P 500 throughout the week.
Healthcare and consumer staples were particularly strong. That’s encouraging because one of the biggest concerns surrounding the market has been its dependence on a relatively narrow group of technology companies. Some of what we’re seeing may therefore be rotation rather than investors abandoning stocks altogether.
That doesn’t eliminate the risks from falling technology shares, given their enormous weight in the major indexes. But a market in which other industries begin participating more consistently would ultimately be healthier.
The Fed Looks Increasingly Likely to Wait
Inflation data complicated the picture this week. Both consumer and producer inflation came in hotter than expected, reinforcing the idea that the Fed’s inflation fight isn’t finished. Yet expectations for an October rate increase have actually declined.
Fed Chair Kevin Warsh declined to signal what policymakers will do at the October 28 meeting, while several other Fed officials have recently emphasized that higher long-term Treasury yields are already tightening financial conditions. Markets therefore increasingly expect the Fed to hold rates steady in October, while leaving another increase later in the year on the table. That has helped provide some relief in the bond market. Longer-term Treasury yields have fallen noticeably from their recent peaks despite the hotter inflation reports.
Oil Is Becoming a Risk Again
One area moving in the opposite direction is energy. WTI crude rose another 2.6% Friday and has now climbed for seven consecutive sessions. That matters because higher energy prices can eventually work their way through gasoline, transportation costs and broader inflation.
Middle East tensions remain elevated, while progress toward resolving the Russia-Ukraine conflict also remains limited. With oil approaching $100 again, energy could become an important complication for the Fed if the recent rally continues.
Here’s Our Take
This week may mark an important transition in the AI investment story. The question is no longer simply whether AI demand is real. It clearly is. The harder questions are now coming to the forefront: How much capital will the buildout require? Who finances it? How quickly will companies earn returns on that investment? And which businesses actually have durable competitive advantages?
That doesn’t mean the AI boom is ending. It means investors are becoming less willing to treat every company connected to AI as an automatic winner. That’s probably healthy after the extraordinary gains we’ve seen across semiconductors, servers, networking and AI infrastructure. There are also encouraging developments outside technology. Broader market participation improved this week, corporate earnings are growing strongly so far, and Treasury yields have retreated from their recent highs.
But there are meaningful risks. Inflation remains stubborn, oil is climbing again and the market’s largest technology companies still have enormous influence over the major indexes. The next phase of this market may therefore depend less on expanding valuations and more on companies actually delivering the earnings necessary to justify them.
That makes next week particularly interesting. Earnings season accelerates significantly, with Meta and Tesla among the major companies reporting. Their results should provide another test of whether corporate fundamentals, and particularly AI-related spending and monetization, can restore confidence after technology’s difficult week.
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