AI Selloff Sparks Broad Market Resilience Amid Midterm Seasonality Debate

Key points

• AI and chip stocks have lost about $5 trillion in market value since October 6, with Nvidia and Alphabet each dropping roughly $835 billion, and Intel losing nearly half its value in October.
• The broader market has shown resilience, with 9 of the 11 S&P 500 sectors rising by at least 1% this week, a phenomenon not seen since 1999.
• The iShares Semiconductor ETF (SOXX) dipped below its July low on Friday but closed back above it, a pattern some analysts interpret as a 'bear trap' rather than a sustained downtrend.
• Historical data suggests the period from the fourth quarter of a midterm year through the following June is typically bullish for the S&P 500 and chip stocks, with median gains of 15% and 22% respectively.
• Bearish analysts, including BofA's Michael Hartnett, argue that 42 global central bank rate hikes over the past six months and weak AI earnings guidance from companies like Intel and Amazon justify a 'risk-off' stance.

Background

This volatility follows a series of recent AI-related market corrections. In late October, fears over AI spending and disappointing earnings from tech giants like Alphabet, Amazon, and Intel triggered a $5 trillion market wipeout. The Nasdaq hit a three-month low, and Intel saw its steepest one-day drop since 1974. This current divergence between AI stocks and the broader market is part of a broader rotation away from high-flying tech into defensive sectors, a trend that has also been observed in China's AI market, which shed $2.4 trillion since May amid weak demand and US sanctions.

How outlets are covering it

Yahoo Finance and Jeff Hirsch of the Stock Trader's Almanac emphasize the historical 'sweet spot' of the presidential election cycle, arguing that the current selloff is an opportunity and that the broad market's resilience is a positive sign. They point to the 'Octoberphobia' and the potential for a 'bear trap' in chip stocks as reasons to be bullish. In contrast, BofA's Michael Hartnett and Yardeni Research caution that the market is 'risk-off' until global rate hikes end, with Hartnett citing 42 central bank rate hikes over the past six months. Yardeni Research also notes that while the S&P 500's rally has broadened beyond the Magnificent Seven, forward earnings expectations are 'too optimistic' and could lead to a correction. Investing.com highlights the potential for a year-end recovery due to post-midterm seasonality but also notes that the Nasdaq 100 has erased its September rally and is trading at a key support area, with some analysts pointing to a potential support at 7,100 for the S&P 500.

Why it matters

The divergence between AI stocks and the broader market is a critical indicator of market health and investor sentiment. If the AI selloff continues, it could drag down the broader market, but if the broad market's resilience holds, it could signal a rotation into other sectors and a potential recovery in AI stocks later in the year. The outcome of the midterm elections and the direction of global central bank policies will be key factors in determining the market's trajectory in the coming months.

What to watch

Investors will be watching the S&P 500's mid-September low near 7,550 and the iShares Semiconductor ETF's (SOXX) July low near $464 as key technical levels. A decisive break below these levels could signal a more sustained downturn, while a recovery above them could confirm a 'bear trap' and a potential rally. The midterm elections on November 3 and the Federal Reserve's December rate decision will also be critical factors in determining the market's direction.