Dip buying lifts US stocks after tech sell-off

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Circle One Jumpstart: What next for tech volatility, quality bonds, and oil prices? (4 mins)

What happened?
US stocks rose sharply on Monday as investors returned to technology and other growth shares after last week’s sell-off. The S&P 500 closed 2.4% higher and the tech-heavy Nasdaq gained 2.7%. The rebound has continued in Asia on Tuesday, with AI-heavy indices in South Korea, Japan, and Taiwan leading the rally, up between 2% and 5%.

Semiconductor shares have led the rebound: The Philadelphia Semiconductor Index rose 6.9%, although NVIDIA shares fell 4.3% following the start of an internal investigation into CEO Jensen Huang. The rally was also relatively broad, with most S&P 500 sectors advancing. Consumer discretionary and communication services were among the strongest performers, while airlines and cruise operators benefited from lower expected fuel costs.

Oil prices have extended their decline as investors assessed the potential for progress in US-Iran diplomacy. Brent crude oil is down 8% this week to just below USD 90 a barrel, while West Texas Intermediate has fallen toward USD 84/bbl. Lower energy costs have eased near-term inflation concerns ahead of Tuesday’s US consumer price report.

What do we think?
In our view, the rebound this week primarily reflects dip buying and a reversal of some of last week’s sharp de-risking. The decline in semiconductor and AI infrastructure stocks had been amplified by elevated positioning, high expectations, and uncertainty surrounding data center development. Monday’s advance is consistent with our assessment that the sell-off represented a positioning reset rather than the beginning of a lasting downturn in the AI investment cycle.

The breadth of the rally is also encouraging. Last week’s weakness was concentrated in chips, data center companies, and other highly valued growth stocks, while Monday’s gains extended across most sectors. This supports the view that investors are differentiating between companies and parts of the AI ecosystem rather than reassessing the broader outlook for economic growth and corporate earnings.

Underlying AI demand also remains robust. Recent earnings have shown accelerating cloud revenue and growing advance orders for computing capacity. We forecast aggregate AI capital spending of USD 1.0tr in 2026, USD 1.4tr in 2027, and USD 1.5tr in 2028. Political and physical constraints may delay, relocate, or raise the cost of data center projects, but they are unlikely to eliminate underlying demand. Regulation may therefore redistribute and extend the investment cycle rather than derail it.

But this week's rebound does not remove the risks that contributed to last week’s volatility. Investors are increasingly demanding evidence that rising AI spending will generate sustainable revenue, utilization, and returns. High expectations and concentrated positioning leave individual companies sensitive to changes in guidance, regulation, financing conditions, and market sentiment. Further technology volatility would therefore not be surprising.

Lower oil prices provide an additional near-term tailwind by reducing pressure on inflation, consumers, and company costs. But the physical oil market also remains vulnerable following earlier supply disruptions and inventory drawdowns. Diplomatic progress could push prices lower, while renewed attacks or a breakdown in negotiations could quickly reverse the move.

Tuesday’s US consumer price report is the next important test. Strong October employment data have kept alive expectations for a December Federal Reserve rate increase. A stronger-than-expected inflation reading could lift bond yields and challenge the equity rebound, while evidence of contained price pressures would support expectations for a measured tightening cycle.

How do we invest?
We continue to see potential for gains in broad equity indices over the next six to 12 months. Resilient corporate earnings and economic growth provide a positive backdrop for equities. But the rapid reversal between last week’s sell-off and Monday’s rally reinforces the importance of diversification and disciplined portfolio construction. We highlight three practical ways to do so.

First, manage concentration risks. Investors should consider retaining exposure to the structural AI opportunity rather than abandoning the theme after periods of volatility. That said, investors with excessive positions in individual technology companies should use periods of market strength to reduce concentration relative to technology and broad equity benchmarks. Diversified exposure across the AI ecosystem can potentially provide participation in growth while reducing dependence on any single company or bottleneck. We favor established technology platforms with existing computing capacity, visible AI revenues, strong balance sheets, and the ability to finance investment internally.

Second, rebalance across sectors and regions. Investors whose technology sector exposure has grown beyond its intended portfolio weight should consider broadening into other sectors. Our preferred US sectors include industrials and health care, and our regional preferences include the Eurozone, where we expect similar 2027 earnings growth to the US but with lower valuations.

Third, build a strong multi-asset core. Investors with significant bond underweights should consider rebuilding strategic allocations. High-quality short- and medium-term bonds offer attractive income and can potentially help diversify portfolios during periods of equity volatility. Alternatives and broad commodity exposure can also provide additional sources of potential return and hedge against geopolitical or inflation shocks for investors willing to tolerate the associated risks of investing in these asset classes.