A sharp technology sell-off raised fresh questions about the AI boom, but strong demand and constrained supply suggest the investment cycle is not ending yet, although investors need to be selective.
Read this article to understand:
- What is driving volatility in AI stocks
- Why selection is becoming more important
- The latest shifts in oil and government bond prices
Ahead of technology firms’ latest results this week, our discussions with the portfolio management team focused on two key questions: was AI demand remaining strong, and how were companies funding the investment needed to meet it?
The answers would either reinforce the team’s view that the AI investment cycle has further to run or provide evidence the outlook was beginning to change.
Technology shares had already been under pressure as investors questioned the scale and likely returns from AI-related capital expenditure. Sentiment weakened further following the US midterm elections, where a landslide victory for the Democratic Party raised concerns about tighter regulation and potential obstacles to new data centre developments.
The sell-off accelerated on Thursday. The Philadelphia Semiconductor Index plunged 12 per cent, its worst day since March 2020, while the S&P 500 declined four per cent. The technology-heavy Nasdaq fell six per cent and a closely watched measure of implied market volatility leapt to its highest level since March.1
Demand for computing power remains exceptionally strong
It would be tempting to conclude the AI story is running out of road. However, the underlying evidence points to something more nuanced. Demand for computing power remains exceptionally strong, while the supply of advanced semiconductors and related infrastructure is constrained.
Major technology companies are still planning to increase investment, cloud revenues continue to grow and some chipmakers have already contracted future production several years ahead.
The more important change is that investors are becoming increasingly discerning about how this spending is financed. Companies that can fund capital expenditure through free cashflow have generally been treated more favourably.
Microsoft was a notable example, with its shares rising seven per cent on Wednesday following results.2 By contrast, businesses relying more heavily on borrowing are facing greater scrutiny as financing costs rise.
Our view is that the AI investment cycle is not over, despite the dramatic market moves. The multi-asset team remains invested in the theme and continues to favour semiconductor companies, where demand remains strong.
Our approach is selective rather than indiscriminately bullish
However, the approach is selective rather than indiscriminately bullish. These are fast-moving markets and, if the facts change, the team’s view and positioning will change too. Exposure to semiconductor companies sits within a broader portfolio, which provides different sources of return and reduces reliance on any single market narrative.
Oil provided one of the week’s clearest examples of how quickly narratives can shift. Brent crude slumped nine per cent on Wednesday, taking it below $100 a barrel for the first time since September, as speculation rose that the US will find a way of backing out of its war with Iran.
Government bonds also benefited as the fall in oil prices eased inflation concerns and investors sought refuge amid the sell-off in technology stocks.
Markets are likely to continue assessing whether the sell-off in stocks reflects a change in AI fundamentals or a reset in expectations next week. But attention will also be on US inflation, with October CPI released on Tuesday and producer prices data at the end of the week.
The figures will be closely watched for clues as to the future path of US interest rates. UK third-quarter GDP data is also due on Thursday, while several Federal Reserve policymakers are scheduled to speak during the week.
Past performance is not a reliable indicator of future results.
References
- Source for all data: Bloomberg, as at 6 November 2026.
- The company mentioned is for illustrative purposes only and does not constitute an investment recommendation.
