Defensive stocks attract flows as tech selling pressures U.S. markets

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Defensive stocks attract flows

Highlights

The S&P 500 and Nasdaq recover from session lows as the 10-year Treasury yield briefly tops 5% before demand drives yields lower.
AI infrastructure stocks fall after Anthropic CEO's AI pause call, but Meta, Alphabet, and Microsoft gain on expectations of moderated capex and improved cash flow.
Investors rotate into defensives such as Johnson & Johnson, Eli Lilly, Kimberly-Clark, and Costco ahead of the Fed meeting amid lingering inflation and monetary tightening concerns.

Market moves before Fed meeting

As reported by CNBC Investing, the S & P 500 and Nasdaq move lower on Monday amid AI safety concerns, though both indexes rebound from their weakest levels as bond market conditions improve. The recovery gains traction after the 10-year Treasury yield rises above 5%, a level not seen since October 2023, before demand for Treasuries pushes prices higher and yields back down.

Oil also remains a pressure point for equities even as prices pare earlier gains. U.S. benchmark West Texas Intermediate crude still settles above $100 a barrel, keeping inflation concerns in focus ahead of the Fed's two-day policy meeting on Tuesday and Wednesday; the CME FedWatch tool shows market odds of an interest rate hike above 92%.

Rotation favors defensives and selected tech

AI infrastructure shares lead the market lower after Anthropic CEO Dario Amodei calls in a weekend essay for an industry-wide slowdown in the development of new AI models. Even so, some investors see the existing AI buildout as constrained more by supply than by demand, raising the possibility that any temporary pause could give supply chains time to catch up.

At the same time, hyperscalers and cybersecurity stocks outperform. Meta Platforms, Alphabet and Microsoft advance on expectations that a slower AI buildout could ease pressure for further increases in capital expenditure, potentially allowing cash flow to catch up and limiting the need for additional debt-funded investment.

Outside technology, investors rotate into traditional defensive sectors seen as less exposed to the broader economy and data center spending trends. Johnson & Johnson, Eli Lilly, Kimberly-Clark and Costco are among the names viewed as better positioned if tighter monetary policy slows growth, while Dave & Buster's is highlighted as a key name ahead of after-the-bell earnings.

In our earlier article on the sell-off in AI infrastructure and semiconductor shares, we explained how renewed calls to slow frontier AI model training on safety grounds rattled expectations for data center and hardware demand. We also noted that the downside case was partly tempered by continued compute needs from deployed models and inference workloads, even as policy risks and a likely Fed rate hike kept near-term volatility elevated.

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