A dip in AI, sector rotation, and oil – will money return to technology?

An understanding of the ongoing sector rotation requires an examination of the energy markets. Although a decline was seen early in the week, the price of Brent crude has remained around the $110 level. Last week, the price of Brent climbed close to the highs seen in the spring of 2026. October has indeed been marked by uncertainties surrounding developments in the Middle East and the security of shipping in the Strait of Hormuz.

At the same time, high energy costs are keeping inflationary pressures alive. US inflation stood at 3.7 percent in September, and the market is pricing in a 70–80 percent probability of an interest rate hike by the US Federal Reserve (Fed) in December. With the yield on the 10-year US Treasury bond currently around 5 percent, the present value of future cash flows for highly valued growth companies is declining. Many market participants have interpreted these developments as supportive energy and defensive sectors.

The sell-off in October hit semiconductors and AI infrastructure particularly hard, with the PHLX Semiconductor Index falling by approximately 15 percent over the course of the month. There are three clear explanations for this downturn.

Pressure from the interest rate environment: Elevated inflation and concerns over rising interest rates have increased the financing costs for heavily indebted AI infrastructure companies.

Financing concerns for "neocloud" companies: Shares in CoreWeave, a leading player in the sector, fell fallen by around 35 percent in October. The yield on the company’s bonds has risen to 15–16 percent, up from an initial issuance rate of 9.6 percent, signaling a clear risk premium. Furthermore, Elon Musk’s warning on October 25, suggesting that more than 200 companies in the sector could collapse or be forced into mergers, has done nothing to improve sentiment toward the industry.

Market reactions to earnings from the giants: Meta’s stock has fallen by around 10 percent following its Q3 earnings report. Although the company’s revenue grew by 26 percent, capital expenditures (CapEx) surged to as much as $34.9 billion, pushing free cash flow into negative territory. With Meta’s full-year investment guidance set at $135–145 billion, investors are demanding clearer evidence of when these investments in artificial intelligence investments will pay off.

End-customer demand, however, has not collapsed. CoreWeave has an order backlog of $104 billion, and cloud software companies have remained stable. Therefore, the issue concerns the sustainability of financial structures above all else, rather than a waning demand for artificial intelligence.

The current earnings week is crucial for setting the direction of technology stocks. Microsoft, Alphabet, and Amazon, in particular, are attracting investors' attention.

The following factors suggest a return:

• Trend sustainability: The volatility in October has not altered the broader picture for the year as a whole, the performance of the indices has clearly been positive, despite various corrective moves.
• Letting out the excess air: According to Goldman Sachs, hedge funds have been selling technology stocks at an unprecedented rate in recent weeks. This may indicate that the most speculative capital has been cleared out of these positions.
• Strong earnings growth: Fundamentals support valuations. According to FactSet, Q3 earnings growth for the S&P 500 stands at an impressive 29.0 percent. If the semiconductor index stabilises a bottom and the tech giants demonstrate that their investments are yielding returns, capital could flow back into the sector just as quickly as it left.

On the other hand, these risks argue against a return:

• Interest rate environment: A potential rate hike by the Fed in December, coupled with 5% bond yields, will inevitably impact debt-financed growth. Furthermore, the tightening of financing conditions in the "neocloud" sector keeps risk premiums elevated for those building infrastructure.
• Rising investor expectations: Meta’s share price reaction showed that the market is now focusing on free cash flow and return on investment (ROI) rather than mere revenue. If major cloud companies increase their capital expenditure without providing clear evidence of returns, there may be continued downward pressure on their share prices.

Higher oil prices may contribute to inflationary pressures and higher interest rates, potentially increasing financing costs for capital-intensive AI infrastructure projects and supporting investor interest in more defensive sectors. The October decline in AI-related stocks does not necessarily indicate a lasting change in the broader theme and may instead reflect a reassessment of valuations and funding risks. Market participants may increasingly differentiate between companies with strong balance sheets and established cash flows and those that are more dependent on external financing.

• SMA200: 200-Day Moving Average, red.
• SMA50: 50-Day Moving Average, blue.
• EMA25: 25-Day Exponential Moving Average, yellow.