The Goldman Sachs AI basket has declined by 22% since early June, according to Fidelity’s Jurrien Timmer. This downturn began with a chip sector selloff that caused a 4.2% drop in the Nasdaq Composite in a single session. The decline intensified on October 22, when the Nasdaq fell by 2.6%, marking its worst performance since early June.
Data through October 25 shows a 20-day negative correlation of 31% between AI-linked stocks and the Bloomberg long-term government bond index. This shift suggests that bonds may act as a hedge against AI stock losses. Investors have moved capital into bonds, pushing the 10-year Treasury yield down to 4.96% from 5.13%.
The effectiveness of this hedge remains limited, as it depends on yields falling due to growth concerns rather than rising inflation. The Philadelphia Semiconductor Index fell 6.7% on October 22, while Meta Platforms shares dropped 7% following an updated capital spending forecast. The cost of insuring Meta’s debt reached a record high on the same day.
Market volatility persists as the Philadelphia Semiconductor Index remains down 12.2% for the month, despite a 2.8% rebound on October 26 following Anthropic's IPO filing. Investors are currently monitoring the FOMC meeting ending October 28 and upcoming PCE inflation data on October 29, with a 78% probability of a December rate hike priced in.
