[Rising Inflation Pressures AI Stocks Downward, While Diversification Offers Persistent Opportunity]
The sinking AI trade and hotter-than-expected inflation data rattled last week’s stock market. But solid bank earnings and a rotation beyond tech gave us reasons for optimism. The Nasdaq’s 4.5% weekly decline broke a four-week winning streak and marked the worst weekly decline for the tech-heavy index since June. The S "SP" P 500 fell 2% last week. The Dow Jones Industrial Average bucked the trend ‑‑ gaining 0.7% as investors rotated into healthcare, consumer staples, and other sectors less dependent on the artificial intelligence boom. The sell‑off accelerated Wednesday after hotter‑than‑expected consumer inflation data raised concerns that the Federal Reserve could keep interest rates elevated for longer. September’s consumer price index rose 3.7% from a year earlier, above the 3.6% expected, while core inflation also came in slightly hotter than anticipated. Thursday’s producer price index offered little relief, jumping 1.3% for the month and 6.3% annually, the biggest annual and monthly gains since March 2022 and December 2022, respectively. Higher inflation, fueled partly by elevated oil prices, threatens to push up borrowing costs and complicate the massive AI infrastructure buildout. Broadcom CEO Hock Tan warned Monday that access to capital could become the industry’s next major constraint. Our cybersecurity stocks were crushed last week, while Meta Platforms and Microsoft had some of the week’s rare bright spots in tech. Against that backdrop, we continued diversifying beyond the AI trade ‑ adding to Kimberly‑Clark on Tuesday as its Kenvue acquisition moved closer to completion. We exited our remaining Honeywell Technologies position on Wednesday to replenish cash. We trimmed Cardinal Health Thursday to lock in profits after its recent rally and bought more Bank of New York following strong earnings Here’s a closer look at the three developments that shaped the market week. AI’s sell‑off makes the case for diversification The AI trade took another hit last week as investors grew concerned about rising borrowing costs and mounting competition in the semiconductor industry. Memory stocks ‒ including Micron , Sandisk , Western Digital , and Seagate ‒ fell after Chinese rival CXMT announced progress on a more efficient chip structure , raising fears of increased competition and a potential supply glut. The iShares Semiconductor ETF extended its losing streak to nine straight sessions, its longest in more than a decade, while the VanEck Semiconductor ETF was down 10% for the week, its worst week since July. Concerns that tech companies are borrowing too much for the AI buildout sent neoclouds like CoreWeave , which has seen its total debt rise to more than $51 billion , plunging 25% last week. Perhaps even more concerning than the stock rout has been the jump in CoreWeave corporate bond yields and spike in credit default swaps , a kind of insurance policy on debt. Our cyber stocks Palo Alto Networks and CrowdStrike were our worst performers of the week, losing more than 18% and 17%, respectively. Reports that OpenAI is in early talks to buy Trail of Bits hurt the cyber sector. An acquisition of this sort would expand OpenAI’s cybersecurity aspirations. The cyber stocks were also caught in the AI trade crossfire. As investors rotated out of AI and into defensive stocks, Kimberly‑Clark and Eli Lilly emerged as some of our portfolio’s best performers last week. The sell‑off reinforced the importance of diversification . “We don’t talk enough about diversification, in part because it’s no fun when one group keeps outperforming the rest of the market,” Jim said Thursday on “Mad Money.” “But when that group crashed to earth over the last few weeks, only diversification could save your portfolio.” It’s unclear how long the rotation will last, but concentrating too heavily in one investing theme leaves investors vulnerable to steep losses and panic selling. Diversification helps cushion those swings and makes it easier to stay invested. Meta and Microsoft prove why patience pays off Not every tech stock got slammed last week. Cloud Holdings Meta Platforms and Microsoft showed why patience with high‑quality companies can pay off. The Facebook and Instagram parent rallied after Monday’s release of its latest AI models , Muse Wonder and the more advanced Muse Wonder Full, which Wells Fargo said ranks among the industry’s best, behind only Anthropic’s Claude Opus 5.5. The launch could attract more paying users and create revenue opportunities beyond advertising, offering further evidence that Meta’s massive AI investments are beginning to pay off. Microsoft closed at a record high Tuesday for the first time in nearly a year, completing a remarkable comeback after shares plunged more than a third on concerns about AI spending and Copilot’s competitiveness. We stuck with the stock because we trusted CEO Satya Nadella and CFO Amy Hood to turn things around. It’s a call Jim reinforced during Thursday’s October Monthly Meeting . Microsoft’s efforts to expand Azure capacity, rein in spending growth, and revamp Copilot helped restore investor confidence. Both recoveries reinforce Jim’s longstanding investing rules: own best‑of‑breed companies, do the homework and avoid panicking when a quality stock falls out of favor. Meta and Microsoft did finish the week down more than 1% each, but that was a far cry better than most of our tech holdings. Salesforce , our big tech standout for the week, gained 5%. It is another stock that Jim believed in when it was getting killed earlier this year. While still down 9% year to date, Salesforce is up 65% since its 52‑week low of $146 in June. Bank earnings impress, but Wall Street isn’t buying. Third‑quarter bank earnings gave us reasons for optimism, even as largely solid results failed to translate into stock gains. Jim said on Wednesday that investors appear more concerned about what lies ahead for the economy than what the banks just reported, given persistent inflation, rising interest rates, and pressure on capital markets. Goldman Sachs delivered a standout quarter Tuesday, with equities trading revenue surging 72%, investment banking fees rising 21% and asset and wealth management exceeding expectations. Despite the strong showing, shares surrendered an early rally. We viewed the weakness as a buying opportunity, upgrading Goldman to our buy‑equivalent 1 rating while maintaining our $1,200 price target. Wells Fargo reported mixed results Tuesday, beating earnings estimates but missing on revenue. Encouragingly, net interest margin stabilized at 2.43% after four consecutive quarterly declines. We upgraded shares to our buy‑equivalent 1 rating and maintained our $95 price target. Bank of New York also impressed Thursday, beating revenue and earnings expectations and raising its full‑year outlook. Strong fee‑based revenue reinforced our confidence in its custody‑focused business model, which generates recurring income and is less dependent on traditional lending. And as mentioned earlier, we got bigger in the position on earnings day.
