Global equity markets diverged sharply this week as a broad selloff in AI-related stocks weighed heavily on technology benchmarks, while defensive sectors and European equities proved more resilient.
Renewed concerns over the economics of AI investment coincided with hotter-than-expected US inflation data, complicating the Federal Reserve’s policy outlook. Despite persistent price pressures, safe-haven demand pushed Treasury yields lower, while stronger headline retail sales masked signs of softer underlying consumption.
Key Insights
- US equities fell as AI concerns drove the Nasdaq down 4.5% and S&P 500 down 1.9%, while the Dow edged higher amid a rotation into defensive sectors.
- AI-related selling spread globally, with South Korea’s KOSPI plunging more than 14% as investors questioned infrastructure spending, valuations and returns on capital.
- US inflation accelerated, with CPI reaching 3.7% and producer prices rising 6.3%, while safe-haven demand pushed the 10-year Treasury yield down to 5.08%.
- Global markets diverged, with the STOXX 600 gaining 2.09% and FTSE 100 rising 3.13%, while Japan’s Nikkei declined 5.37%.
- Oil surged above $100 amid Middle East tensions, while attention turns to Meta’s earnings, China’s GDP and the Fed’s 28 October policy decision.
Technology Stocks Tumble as AI Valuations Face Scrutiny
It was a bruising week for technology investors. A sharp and indiscriminate selloff in AI-related stocks drove the Nasdaq down 4.5%, leaving the index 5.3% below the record high it set just twelve days earlier.
The S&P 500 fell 1.9%, though the Dow proved remarkably resilient, edging fractionally higher as money rotated into healthcare, consumer staples and other defensive corners of the market.
The divergence between growth and value tells the fuller story: the large-cap growth benchmark fell 5.0% for the week while its value counterpart gained 0.9%, a swing of nearly six percentage points.
AI Investment Concerns Trigger a Global Semiconductor Rout
The trigger for the technology rout was a broader reassessment of AI economics rather than any single negative event.
Questions about the scale of financing required to build out AI infrastructure, the returns on capital being generated by hyperscaler investment, and the sustainability of valuations in a world of 5% Treasury yields converged into a single wave of selling.
Semiconductor and memory stocks bore the brunt of it globally, with South Korea’s KOSPI falling more than 14% on the week and now down nearly 38% from the record high it reached in June.
Samsung Electronics and SK Hynix both suffered severe losses as investors reconsidered the AI demand assumptions that had driven Asian chip stocks to extraordinary valuations earlier in the year.
A temporary trading halt was triggered as the KOSPI fell to a six-month low on Thursday before a partial recovery on Friday.
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Hotter Inflation Complicates the Fed’s Outlook as Treasury Yields Fall
The macroeconomic backdrop did nothing to help. September CPI came in at 3.7% year on year, above the 3.6% expected and sharply higher than August’s 3.4%, with gasoline prices accounting for more than half of the monthly increase.
Core CPI accelerated to 2.6% from 2.4%, a troubling broadening of price pressures beyond energy. Producer prices were even more alarming, rising 6.3% annually, the fastest pace since December 2022 and well above the 5.4% consensus.
The combination of an accelerating inflation print and a collapsing technology sector created a particularly uncomfortable environment for the Fed, which finds itself squeezed between financial stability concerns and an inflation mandate it has not yet fully discharged.
Fed Chair Warsh declined to offer any guidance on the 28 October meeting, stating only that the central bank is no longer in the business of prejudging outcomes.
Rate futures markets are pricing roughly a 17% probability of a hike, little changed despite the hotter inflation data, as the AI-driven risk-off shift pushed investors toward the safety of longer-dated Treasuries. The 10-year yield fell to 5.08% from 5.24%, and the 30-year dropped to 5.43% from 5.60%.
US Retail Sales Beat Expectations but Underlying Demand Softens
US retail sales rose 0.8% in September, well ahead of the 0.3% consensus, though the headline masked a much softer underlying picture.
Excluding petrol station receipts, which surged 6.4% on higher fuel costs, the control group measure that feeds into GDP rose just 0.1%. The labour market remained firm, with initial jobless claims printing below 200,000 for a fifth consecutive week.
European Equities Outperform as Japanese Markets Decline
European equities had a considerably better week. The STOXX 600 advanced 2.09%, with the UK’s FTSE 100 leading the major markets with a 3.13% gain as sterling weakness and the index’s significant energy sector weight provided tailwinds.
The UK’s August GDP surprised to the upside at 0.1% growth, against expectations of a contraction, though the numbers were too modest to significantly alter the Bank of England’s calculus.
Japan’s Nikkei fell 5.37% in a holiday-shortened week, with the technology-heavy index hit harder than the broader TOPIX, which declined 0.95%. The 10-year Japanese government bond yield fell to 2.94% as safe-haven demand flowed into bonds, while the yen held broadly steady around JPY 158 against the dollar.
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