Worries over AI financing costs are continuing to weigh on market sentiment, a defensive rotation is picking up pace, and earnings from hyperscale technology companies are becoming the key moment for testing returns on AI investment.
Concerns about the cost of financing AI are spreading more quickly from credit markets to stock markets and have become a core obstacle to U.S. equities reaching new highs. The selloff in tech stocks has not driven investors to abandon risk assets entirely, but instead has triggered a defensive rotation of rare intensity 鈥?the S&P 500 equal-weighted index's outperformance versus the market-cap-weighted index this month is the sixth-largest since 1990, nearly three standard deviations away from the historical average.
A team led by Bank of America strategist Michael Hartnett has explicitly recommended staying tactically defensive through mid-November, and warned that if hyperscaler bond spreads break through 200 basis points, investors could be forced to cut risk exposure further. At the same time, the correlation between the Nasdaq 100 and 10-year U.S. Treasury yields has risen markedly, with bonds once again taking on the role of hedging tech-stock risk.
This week, Microsoft Corp (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOGL) and Oracle Corp (NYSE: ORCL) will report earnings in succession, giving the market a chance to assess whether AI capital expenditure can be converted into visible returns. The convergence of technical and fundamental factors makes this week a crucial point for AI trading.
Defensive rotation accelerates as equal-weighted S&P hits historic extreme
The continued pullback in tech stocks has not triggered broad risk aversion, but has instead produced a structural reallocation of capital. According to Bloomberg data, the S&P 500 equal-weighted index's outperformance versus the market-cap-weighted index this month is the sixth-largest since 1990 and nearly three standard deviations from the historical average, a direct reflection that funds are withdrawing from mega-cap tech stocks at an extreme pace and moving into the broader market.
Futures positioning data also points to cautious sentiment. According to six-week rolling data from the U.S. Commodity Futures Trading Commission through Oct. 20, fund flows in S&P 500 futures remained in net outflows, while buying interest in Nasdaq futures nearly disappeared around the middle of the month. Although the six-week rolling data rebounded slightly last week, it has not yet captured the sharp decline that followed. Since U.S. stocks hit a record high on Oct. 6, the divergence between the Nasdaq 100 and the S&P 500 has become increasingly obvious 鈥?the former has moved toward a statistical outlier range, while the latter remains within normal fluctuation bounds. That divergence precisely captures the depth of the rotation and the intensity of investors' repricing.
Semiconductor valuations contract as SOX approaches oversold threshold
The semiconductor sector has borne the brunt of this rotation. According to Bloomberg data, the Philadelphia Semiconductor Index (SOX) is approaching oversold levels while also nearing its 200-day moving average, a key technical support level. More notably, semiconductor valuations have fallen to about 17 times forward earnings 鈥?a level that twice marked a phase bottom for the index over the past two years, making it an important technical reference.
Goldman Sachs head of European single delta trading Richard Privorotsky summarized the current market dynamic as "AI damaged, bonds benefit," and noted that the market is synthetically cutting capital expenditure expectations and lowering growth expectations, thereby easing duration pressure. He said investor concerns span multiple levels, including "the ability to deliver gigawatt-scale compute, overcapacity or undercapacity of compute, capital adequacy, power supply, and the political direction after the midterm elections and cybersecurity risks."
Bonds regain hedging role as credit spreads become key risk threshold
As semiconductor and hyperscaler stocks were sold off, a reassessment of economic growth expectations pushed U.S. Treasury yields lower, re-establishing the negative correlation between bonds and tech stocks. The Nasdaq 100 and 10-year U.S. Treasury yields have moved lower in tandem, with their correlation turning positive, meaning bonds are once again fulfilling their traditional role of hedging tech-stock risk.
The Bank of America strategist team noted that if hyperscaler bond spreads break through 200 basis points, that would become a key trigger forcing investors to reduce risk, at which point concerns about stress in the shadow banking system would heat up further. The team expects bond yields, stocks and the dollar to remain under pressure until the market fully prices in expectations that Democrats will win a sweeping victory in the midterm elections. Potential interim turning points include intervention to stabilize turmoil in the French bond market, cuts to AI capital expenditure, or equity financing that helps bond spreads peak.
Hyperscaler earnings week: return on capital expenditure becomes core issue
This week, Microsoft Corp (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOGL) and Oracle Corp (NYSE: ORCL) will release earnings one after another, providing key fundamental validation for AI trading. The core question for the market is how quickly these companies can convert backlog into actual revenue, what the pace of compute deployment will be, and whether future capital expenditure plans will be maintained.
A team led by Amundi Investment Institute strategist Monica Defend listed "weaker-than-expected monetization" as the main risk scenario, and noted that "if monetization disappoints, both capital expenditure and valuations could decline, while the debt burden remains, dragging on growth and pressuring stocks." The team also stressed that earnings visibility and sustainable financing conditions will be decisive factors. Its base case is "absorption rather than rupture" 鈥?nominal growth remains supported, inflation expectations are anchored, credit markets are orderly, and investment activity remains strong.
At this point, technical signals (SOX approaching oversold, semiconductor valuations touching a historical bottom range) and fundamental validation (hyperscaler earnings) are converging. The results of this week's earnings will largely determine whether AI trading can rebuild market confidence or further intensify the transmission of financing-cost anxiety into the broader market.
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