The week's market moves were dominated by a deepening retreat from the AI trade. The iShares Semiconductor ETF extended its losing streak to nine consecutive sessions, its longest in more than a decade, while the VanEck Semiconductor ETF was down 10% for the week, its worst since July. Memory chip 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.
Inflation data added to the pressure. September's consumer price index rose 3.7% from a year earlier, above the 3.6% expected, and core inflation came in slightly hotter than anticipated. Thursday's producer price index jumped 1.3% for the month and 6.3% annually, the largest annual and monthly gains since March and December 2022, respectively. Higher inflation, partly driven 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.
The sell-off hit neoclouds especially hard. CoreWeave, which has seen its total debt rise to more than $51 billion, plunged 25% for the week. More concerning than the stock rout, the source noted, has been the jump in CoreWeave's corporate bond yields and a spike in credit default swaps.
Cybersecurity stocks were among the worst performers. Palo Alto Networks lost more than 18% and CrowdStrike dropped over 17% for the week, caught in the AI trade crossfire. Reports that OpenAI is in early talks to buy cybersecurity firm Trail of Bits also weighed on the sector, as an acquisition would expand OpenAI's cybersecurity ambitions.
In contrast, defensive stocks rallied. Kimberly-Clark and Eli Lilly emerged as strong performers as investors rotated out of AI. The Dow rose 0.7% as money moved into healthcare, consumer staples, and other sectors less dependent on the AI boom. The S&P 500 fell 2% for the week.
Jim Cramer, speaking on "Mad Money" Thursday, highlighted the value 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," he said. "But when that group crashed to earth over the last few weeks, only diversification could save your portfolio." The source noted that while it is unclear how long the rotation will last, the sell-off reinforced the importance of spreading investments across sectors to cushion against steep losses.