AI Trade Faces a Critical Week: Microsoft, Amazon, and Google Earnings to Test Returns on Capital Expenditure

Market concerns over AI financing costs are accelerating their transmission from the credit market to the stock market, becoming the core obstacle to the US stock market hitting new highs. The selloff in tech stocks has not prompted investors to fully withdraw from risk assets, but has triggered a defensive rotation of rare intensity—the S&P 500 equal-weight index's outperformance relative to the market-cap-weighted index this month marks the sixth-largest on record since 1990, deviating from the historical average by nearly three standard deviations.

The team led by BofA strategist Michael Hartnett explicitly recommends "staying tactically risk-averse until mid-November," and warns that if hyperscaler corporate bond spreads break through 200 basis points, it could force investors to further cut risk exposure. Meanwhile, the correlation between the Nasdaq 100 and 10-year US Treasury yields has risen significantly, with bonds once again taking on the role of hedging tech stock risk.

Defensive rotation accelerates, equal-weight S&P hits historic extreme

The continued pullback in tech stocks has not triggered broad risk aversion, but has spawned a structural reallocation of capital. According to Bloomberg data, the S&P 500 equal-weight index's outperformance relative to the market-cap-weighted index this month is the sixth-largest since 1990, deviating from the historical average by nearly three standard deviations, directly reflecting that capital is fleeing mega-cap tech stocks at an extreme pace and rotating into the broader market.

Looking at futures positioning data, market sentiment is similarly cautious. According to six-week rolling data from the US Commodity Futures Trading Commission (CFTC) through October 20, fund flows in S&P 500 futures have continued to see net outflows, buying in Nasdaq futures nearly vanished around mid-month, and although the six-week rolling data rebounded slightly last week, it has not yet captured the subsequent sharp decline. Since US stocks hit a record high on October 6, the divergence between the Nasdaq 100 and the S&P 500 has become increasingly pronounced—the former has moved toward statistical outlier territory, while the latter remains within normal fluctuation range, a divergence that precisely captures the depth of the rotation and the magnitude of investors' repricing.

Semiconductor valuations contract, SOX approaches oversold threshold

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Richard Privorotsky, head of European single-Delta trading at Goldman Sachs, summarized current market dynamics as "AI hurt, bonds benefit," and noted that the market is synthetically cutting capex expectations and lowering growth expectations, thereby easing duration pressure. He said investor concerns span multiple dimensions, including "the ability to deliver gigawatt-scale compute, compute surplus or shortage, capital adequacy, power supply, as well as the political direction after the midterm elections and cybersecurity risks."

Bonds regain hedging function, credit spreads become key risk threshold

As semiconductor and hyperscaler stocks came under selling pressure, the market's reassessment of growth expectations pushed US Treasury yields lower, and the negative correlation between bonds and tech stocks was re-established. The Nasdaq 100 and 10-year US Treasury yields have moved lower in tandem, with their correlation turning positive, meaning bonds are once again performing their traditional function of hedging tech stock risk.

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Hyperscaler earnings week: return on capex becomes core issue

This week, Microsoft, Amazon, Alphabet and Oracle will report earnings in succession, providing key fundamental validation for the AI trade. The core questions the market is focused on: how quickly these companies can convert backlog into actual revenue, the pace of compute deployment, and whether future capex plans are maintained.

The team led by Amundi Investment Institute strategist Monica Defend lists "monetization falling short of expectations" as the main risk scenario, and notes that "if monetization disappoints, both capex and valuations could decline, while the debt burden remains, which would drag on growth and pressure stocks." The team also emphasizes that earnings visibility and sustainable financing conditions will be decisive factors. Its base case is "absorption rather than rupture"—nominal growth remains supported, inflation expectations are anchored, credit markets are orderly, and investment activity remains strong.

At the current juncture, technical signals (SOX approaching oversold, semiconductor valuations touching the historical bottom range) and fundamental validation (hyperscaler earnings) are converging, and this week's earnings results will largely determine whether the AI trade can rebuild market confidence or further intensify the transmission of financing cost anxiety to the broader market. Risk disclosure and disclaimer

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