AI-driven stock rally needs tech leadership to keep advancing

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AI-driven stock rally and tech

Highlights

Walmart, Berkshire Hathaway, and Eli Lilly gained $550 billion in market value over the past month, offsetting Alphabet's loss as investors rotated into defensive stocks.
The S&P 500's forward price-to-earnings ratio declined to 18.5 from 23 a year ago, while the Nasdaq-100 now trades at its narrowest premium to the S&P 500 in nine years.
AI-linked stocks remain near 45% of S&P 500 weighting even after recent declines, underlining the need for tech leadership to sustain the broader market rally.

Defensive rotation clouds AI market outlook

As reported by CNBC, investors are piling into traditionally defensive stocks such as Walmart, Berkshire Hathaway and Eli Lilly while selling semiconductors and companies tied to the AI infrastructure buildout. Those three companies, the only members of the $1 trillion market-cap club outside Big Tech, have added a combined $550 billion in market value over the past month, nearly offsetting Alphabet's loss over the same period.

The rotation is helping prevent a sharper setback in the S&P 500, but it is also keeping the index pinned around levels that date back to May, even after two earnings-reporting seasons with 30% annual profit growth. The Nasdaq-100 closes Monday at its 200-day moving average, almost 11% below its record high, while the Philadelphia Semiconductor Index falls another 3.8% and finishes below its late-July low.

JPMorgan technical strategist Jason Hunter says clients should remain defensive until charts show a clearer bottoming process or unmistakable signs of capitulation. That cautious view comes as AI-related stocks fail to rebound convincingly despite moderate oversold conditions and superficially strong quarterly results from hyperscalers.

Valuation reset shifts focus to market impact

Technology still carries outsized influence over the broader market. According to Morgan Stanley, AI-related stocks remain near 45% of the S&P 500 by weighting even after pulling back from their highs, reinforcing the view that the broader bull market likely needs the AI trade to stabilize if it is to resume advancing.

The latest phase is more difficult for investors to navigate because earlier bottlenecks in the AI buildout offered clearer ways to position, from Nvidia during the GPU shortage to hyperscalers, industrial suppliers and memory makers as constraints shifted. Now, with Nvidia chief Jensen Huang saying capital is the main constraint, the pressure is spreading more broadly through funding costs as mega-cap companies move into negative free-cash-flow territory.

Even so, the selloff is easing some valuation pressure. The S&P 500's forward price-to-earnings ratio has fallen to 18.5 from 23 a year ago, while the Nasdaq-100 at 20 times earnings is trading at its slimmest premium to the S&P 500 in nine years. Sentiment toward AI stocks is weak and tech positioning has slipped below neutral, leaving room for relief rallies if market pressure begins to ease after the midterm elections.

In our earlier article on the Nasdaq-100’s selling pressure and the launch of the blockchain-native JQQQ fund, we noted that the index was slipping below key short- and medium-term moving averages while traders watched nearby resistance and downside breakout levels. The piece highlighted how the new vehicle could broaden longer-term access to the Nasdaq-100, even as near-term momentum stayed mixed and risk remained skewed to further declines.

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