AI and Tech Lose Favor
Some shareholders at Anthropic's Investor Day discussed a valuation near $1.5 trillion, down from the roughly $2 trillion investors expected earlier. The company is set to go public sometime in November 2026.
This week money moved to defensive, value-oriented investments. The NASDAQ fell 2%, the S&P 500 fell 1%, and the Dow Jones rose on the week. Investors are nervous about valuations and inflation heading into the midterm elections. Money came out of AI-themed investments, memory stocks, and AI infrastructure, which took a big hit. These areas have turned political, and the outcome there is unknown.
Money flowed into defensive consumer staples. McDonald's (MCD), Home Depot (HD), and Walmart (WMT) all had strong weeks. This theme could continue as uncertainty builds near the elections.
Inflation Is a Real Concern
Yes, inflation worries me. This week brought a hot CPI reading and a hot PPI reading. Outside the pressure on tech, the market held up well. A surprise this week was the bounce back in bond prices and the drop in yields, which fit the shift toward lower-risk, defensive investments.
Fed policy and higher interest rates are the main risk. Higher interest rates hurt the economy long term. When borrowing costs rise across the economy, it eventually hits the equity market.
How Long Does the Resilience Last?
Investors have been very resilient. Every wave of selling, volatility, and selloffs this year has been short-lived. That is why the broad indexes are still very close to their all-time highs. I do not see that changing, because investors are confident in equities. Breaking that confidence would take a major event: a real shift in the economy or a real drop in earnings as third-quarter results come out.
The Growth-Versus-Value Rotation
The rotation is not only this week's story; it has run all year, with repeated moves into and out of tech. Growth has a big place in many investor portfolios.
Stay diversified. Growth has been so prominent that investors have overweighted portfolios in more speculative, higher-growth, higher-beta names, chasing extra returns. You need to look now at undervalued, unloved sectors: consumer staples, health care, and certain financials. Valuations there are very attractive, and they hold great companies that belong in a portfolio.
Higher-beta names and levered ETFs carry extra risk. When memory stocks came under pressure, levered ETFs saw double the pressure this week.
Tech: Buying Opportunity or Warning?
Tech is splitting into different segments. I would be wary of AI infrastructure and memory stocks; that area has turned very political, and the outcome is unknown.
Big tech, the "Magnificent Seven" names, is holding up well. Meta (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) are still positions investors can feel confident keeping. For other parts of tech, I would stay on the sideline for a while.
Building a Portfolio Now
The S&P 500 is almost 30% tech. To stay in line with the broad market, you need a tech allocation in the high-20% to 30% range. Tech is still where long-term growth is projected to be very high, so it has to be a big part of a portfolio. The problem is that it raises the portfolio's risk. Investors must decide where they sit on the risk scale and whether they are comfortable holding more volatility to get higher returns. That is a constant conversation between investors and their advisers.
