U.S. equities opened with a pronounced divergence on Thursday, as a sharp selloff in artificial intelligence-related shares dragged major benchmarks lower even as the majority of stocks advanced. The S&P 500 slipped approximately 0.5% in early trading, while the tech-heavy Nasdaq Composite dropped about 1.2%. In contrast, the Dow Jones Industrial Average climbed roughly 269 points, or 0.5%, reflecting a rotation away from high-flying technology names.
The breadth of the market told a different story than the headline index declines. According to TS2.Tech's live count, 355 of the 499 S&P 500 constituents traded higher just minutes after the open, with advancers outnumbering decliners by a margin of 2.48 to one. The median component gained 1.17%, underscoring that the selloff was concentrated in a narrow group of mega-cap tech stocks rather than reflecting broad-based weakness.
This divergence was clearly visible in fund flows. The equal-weight S&P 500 fund (RSP) gained 0.5% by 09:53 EDT, while its cap-weighted counterpart (SPY) fell 0.5%, creating a 1.0-percentage-point gap. That gap highlights that the benchmark's decline was driven by the heavy weighting of AI leaders like Nvidia (NVDA), Advanced Micro Devices (AMD), and Broadcom (AVGO), all of which posted significant losses.
The pressure on tech stocks followed another inflation shock. The producer price index (PPI) surged 1.3% in September, the largest monthly increase since March 2022, driven largely by a 10.8% jump in energy prices. Retail sales also rose 0.8%, though excluding gasoline stations, the gain was a more modest 0.2%. Despite the hot inflation data, Treasury yields eased, with the 10-year yield falling to approximately 5.09% from 5.32%, as investors sought safe-haven assets.
Consumer staples and health care led the rebound, with Walmart (WMT) gaining 3.8% and the sector fund (XLP) rising 2.4%. Eli Lilly (LLY) added 3.3%, and UnitedHealth (UNH) climbed 2.7%. Meanwhile, technology shares tumbled, with Nvidia falling 3.3%, AMD losing 5.6%, and Broadcom sliding 2.9%. CoreWeave (CRWV) dropped another 8.6% following Wednesday's 15.5% plunge, while Taiwan Semiconductor (TSM) fell 5.2% in New York despite reporting record quarterly profit and better-than-expected results, with the company reiterating that AI demand remains very strong.
The market's reaction suggests investors are reducing concentrated AI exposure while rotating into other earnings streams. Lorraine Tan, Morningstar's Asia equity-research director, highlighted the valuation risk, telling the AP, "The key issue is a possible mismatch between the market's growth expectations for the tech sector and what may eventuate." This sentiment is echoed in analyst recommendations, which remain constructive on selected defensive leaders and TSMC, though UnitedHealth's current calls span a range from Buy to Hold.
Bonds rallied alongside the rotation, with the 10-year Treasury yield easing to around 5.09%. The dollar index fell about 0.4% to 102.1, while WTI crude traded near $95 a barrel and Brent near $104. Gold also gained, with the largest gold fund (GLD) rising 1.2%.
Looking ahead, the key test will be whether the equal-weight fund can continue to outperform its cap-weighted counterpart. A renewed rise in Treasury yields could challenge both AI valuations and the early defensive bid. The next macro catalyst arrives Friday, October 16, at 09:15 EDT, when the Federal Reserve releases September industrial production. Until then, the market's unresolved question is whether 71% positive breadth can survive another day of AI deleveraging.
