U.S. market rotation gains traction as investors shift from AI stocks to defensive sectors

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US market rotation: AI to defensive

Highlights

Investors rotate from AI stocks to defensive sectors as the Nasdaq falls, Dow rises and S&P 500 holds flat, reflecting a shift in market positioning.
September Producer Price Index jumps 1.3% monthly and 6.3% year-over-year, while retail sales beat by rising 0.8%, fueling concerns over inflation and future rate hikes.
AI sector shows resilience with Anthropic quarterly revenue up 50% to $16.8 billion and TSMC net profit surging 69% year-over-year, though TSMC signals caution due to supply and consumer demand risks.

Sector shift and economic data drive trading

As reported by Cboe Global Markets, Thursday's trading shows signs of a rotation cycle, with investors cutting large positions in one sector and moving into areas seen as safer havens.

Early in the session, the three major U.S. indices diverge as the tech-heavy Nasdaq Composite falls while the Dow Jones Industrial Average moves higher and the S&P 500 stays near flat. The moves reflect selling in leading AI-related shares and stronger demand for more defensive names that carry more weight in the Dow.

Before the close, sentiment improves as Treasury yields move lower and some technology stocks recover. CoreWeave finishes in positive territory after trying to rebound from Wednesday's 15% drop, helped by supportive comments from analysts and Nvidia Chief Executive Jensen Huang, who says at a Bloomberg event in Stockholm that the company's strength is improving and its cost of capital is decreasing.

Market sentiment also responds to inflation and spending figures released Thursday morning. The Producer Price Index rises 1.3% in September and 6.3% from a year earlier, the biggest increase since December 2022, while diesel prices are up 21% and gasoline prices jump 20.3% as oil shipments continue to face disruption in the Middle East.

U.S. retail sales also come in stronger than expected, rising 0.8% in September versus Wall Street expectations for a 0.3% gain, while August is revised up to 1.3%. The figures suggest consumer spending is holding up despite higher prices, though the data is not adjusted for inflation and may reflect price effects more than stronger volumes.

Rate expectations and AI outlook remain in focus

Hotter inflation and firm retail sales add to concerns that interest rates could rise sooner than previously expected. The CME FedWatch tool still indicates rates are likely unchanged at this month's Federal Reserve meeting, but points to a possible 25 basis-point increase in December, while CNBC cites Mizuho analyst Alex Pelle as saying the Fed has little reason to hesitate based on the economic data alone.

The selling pressure in AI stocks has been building as investors reassess whether multibillion-dollar spending on a still-developing technology can justify current valuations. At the same time, the broader pullback may also reflect profit-taking after strong gains in many AI-linked shares this year rather than a retreat from the technology itself.

Results from AI and semiconductor companies continue to show underlying demand strength. Anthropic tells investors that quarterly revenue rises 50% to $16.8 billion ahead of a potential IPO this year, while Taiwan Semiconductor Manufacturing Co. posts net profit growth of 69% from a year earlier, beating estimates and delivering a sixth straight record quarterly profit.

TSMC says demand remains extremely robust but tempers its outlook because of potential supply constraints and pressure on consumer-facing end markets. Chief Executive C.C. Wei says on an earnings call, as quoted by Reuters, that consumer and price-sensitive segments are being challenged by rising component prices and macroeconomic uncertainty, leading the company to stay prudent in business planning going into 2027.

Our earlier coverage on the S&P 500’s push toward 8,000 explained how the rally has been heavily driven by AI-linked megacaps, while investors weigh whether strong Q3 earnings can offset higher oil prices, elevated Treasury yields, and political uncertainty. That piece also flagged narrowing market breadth and concentration risk, noting that many index components were lagging even as the headline benchmark stayed near record levels.

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