Analysis-October dive for AI-related shares tests broader US stock market's resilience

0

Share

By Lewis KrauskopfMon, November 2, 2026 at 10:03 AM UTC

By Lewis Krauskopf

NEW YORK, Nov 2 (Reuters) - A steep decline in the prices of US AI and technology stocks is testing investors' enthusiasm to shift into other equity areas, a rotation that has propped up broader indexes in recent weeks.

Disappointing results from Alphabet, Amazon and Intel dealt the latest blow to the AI trade. Investors worry about the hefty financing needed to fund massive investment spending. They are also starting to question whether returns will be robust enough to justify that spending.

The broader market in October held up far better than tech- and AI-exposed equities did, but it may not be able to endure a more severe pullback in the massive AI trade. The tech sector alone accounts for a 38% weight in the S&P 500.

Investors are wary of signs that the selling will spread. A main alarm would be indications that the AI hyperscalers pull back significantly on spending plans. Their investment in data centers and other infrastructure has been a key driver for overall economic growth.

"You can have a month of a significant shift in leadership and tech weakness and relative strength in everything else," said Mark Hackett, chief market strategist for Nationwide. However, "if you have another month of (a steep) drop ... it's so big that mathematically it's difficult, but I think even more importantly, psychologically it's difficult."

Friday's action illustrated such worries. A whopping 4.2% drop on the day for the tech sector, which included a nearly 29% tumble for Intel, drove a 1.8% decline for the S&P 500.

For October, the S&P 500 tech sector slid 6.8%, its biggest monthly drop since March 2025. Yet nine of the S&P 500's 11 sectors gained in October — allowing the benchmark index to end with a monthly decline of less than 1%.

The S&P 500 is up more than 10% so far in 2026. Yet rotations have been a theme for the past year. Leadership has often vacillated between heavyweight tech and AI stocks on one hand, and a broader group of sectors on the other.

September, for example, showed opposite trends to October, with dominance that month from tech and AI stocks.

"This year has been unbelievably stable at the index level," Hackett said. "But there's so much volatility beneath the surface."

Advertisement

October trading indicated a sign of broadening. Despite sharp declines in AI names, more than 70% of S&P 500 constituents were up on the month. Indexes representing small- and mid-cap stocks also rose in October.

"Both corporate and consumer fundamentals remain healthy," said Angelo Kourkafas, senior global investment strategist at Edward Jones. "In this backdrop, investors want to maintain equity exposure. But now they want to reduce AI concentration risk and are adding to areas that offer differentiated sources of return."

That desire to maintain equity exposure could be challenged in the near term, if the AI theme falters more severely.

AI investment spending has not only driven profits for semiconductors and companies involved in building data centers, it has also been central to overall US economic growth.

If big tech companies "start pulling back on capex, which has supported economic growth, it has boosted earnings across many different areas of the economy — that can be something that may be more impactful in terms of driving a broader risk-off sentiment," Kourkafas said.

Oxford Economics estimates that about one-third of recent US economic growth stems from AI. That includes the net impact of direct investment to support expansion of AI infrastructure as well as some contribution from the wealth effect from stock market gains that has lifted consumer spending.

"The consumer is fine, but the consumer isn't the reason the economy looks good. The economy looks good because of AI," said Marta Norton, chief investment strategist at retirement and wealth services provider Empower. "So you start pulling the rug out from under AI in an actual meaningful way, I think that changes the dynamics for the markets."

Meanwhile, the market action could start to cause broader worry. The S&P 500 on Friday closed below its 100-day moving average — a medium-term trendline — for the first time since April.

While the index has bounced off that trendline several times in the past two years, "when it has broken below ... in any material way, it was followed by a much further drop over the following weeks," said Matthew Maley, chief market strategist at Miller Tabak.

"If the major averages begin to drop in a more compelling manner, it is very likely that investors will stop rotating into other sectors ... and start rotating into cash," Maley said in a note on Friday.

(Reporting by Lewis Krauskopf; Editing by Megan Davies and David Gregorio)

Original Article on Source

Source: “AOL Money”