Key facts
- Neocloud firms and chip stocks have seen significant declines in early October.
- Rising borrowing costs and inflation fears are key drivers of the AI trade sell-off.
- Investors are concerned about potential overbuilding and a glut of AI compute capacity.
- Healthcare, financials, and energy are suggested as defensive sectors.
- Agentic AI and AI adopters are identified as potential investment themes.
The AI trade has experienced a significant downturn in early October, with neocloud firms and chip stocks facing substantial losses. The Roundhill Neocloud ETF (NCLD) has dropped 31%, while the iShares Semiconductor ETF (SOXX) is down 13%. The Defiance AI and Power Infrastructure ETF (AIPO) has also declined 14%.
Rising borrowing costs, fueled by fears of leverage in neocloud companies and persistent inflation, are major contributors to the sell-off. Higher interest rates increase the cost of building AI infrastructure, prompting a reassessment of risk-reward profiles. Concerns about overbuilding and a potential glut of compute capacity are also dampening sentiment.
In response to the volatility, market professionals are advising investors to diversify. Ross Mayfield suggests overweighting healthcare, financials, and energy as hedges, while also remaining bullish on hyperscalers and power infrastructure. Travis Prentice recommends focusing on agentic AI, cybersecurity, and AI adopters like MetLife and Visa. James Russo advocates for quality-factor stocks and companies with durable competitive advantages, highlighting funds like the AI Quality Growth ETF (AQGX) and Defiance AI Hyperscale Leaders ETF (AIHY).