Markets Brief: Chip Stocks Sell Off, Investors Rotate Into Value, and What to Watch in Big Tech Earnings

It was a bumpy week in the markets, with semiconductor stocks selling off sharply as worries about the durability of the artificial intelligence trade weighed on sentiment. Meanwhile, shares of CoreWeave CRWV plunged when its debt accrued to fund data center construction began trading at levels indicating distress.

Data center bonds also scraped fresh lows last week, as Cipher Digital’s new debt raise fueled investor anxieties on AI overspending. CoreWeave bonds bore the brunt of the selloff.

In this week’s Market Brief:

• Investors are rotating out of growth stocks and into value, though some strategists say the AI trade still has legs.
• Is the AI buildout really pushing up consumer prices? Goldman Sachs economists crunch the numbers.
• Big tech earnings get underway this week. Morningstar equity analyst Malik Ahmed Khan lays out what investors should be watching.

The Market Rotation Continues

As semiconductor names plunged, investors backed out of growth stocks and value climbed higher, with the Morningstar US Core Cap Growth Index down 1.9% for the week through Thursday, while the Morningstar US Core Cap Value Index was up 0.6%.

The Morningstar Global Semiconductors Index tumbled 5.8% through Thursday’s close, with Nvidia NVDA down 5.2%, Taiwan Semiconductor Manufacturing TSM down 8.4%, and Broadcom AVGO down 7.8%.

In fixed income, bonds fell as investors sought safety outside of equities. The yield on the 10-year US Treasury note dropped to 5.13% after peaking at 5.32% earlier in the week.

Even as the AI trade remains volatile, some strategists are still constructive on the sector. In emailed commentary on Thursday, Ulrike Hoffmann-Burchardi, CIO Americas and global head of equities at the UBS Chief Investment Office, wrote: “While increased competition within AI, rising financing requirements, and higher rates may periodically add to volatility, we view this latest bout as more of a recalibration of expectations than a fundamental break in the AI investment story. We suggest investors focus on where AI spending is translating into sustainable earnings growth and broader enterprise and consumer adoption.”

AI and Inflation

Is AI really driving up inflation? From Wall Street to the Federal Reserve and beyond, the buildout of AI infrastructure is often cited as a major source of upward pressure on prices. In new research released this week, Goldman Sachs economists argue that AI’s effect on prices is both overstated and near its peak. They looked under the hood of the AI buildout, considering its impact on software prices, its effect on the price of computer components, the demand for power from data centers and the associated increase in electricity prices, and the rising prices of the industrial metals used in the construction of data centers.

Overall, the economists found that AI is responsible for a roughly 0.45% increase in CPE inflation, and that half that figure is attributable to the actual impact of AI rather than measurement errors. They describe that impact as “meaningful but moderate,” and expect that it is near its peak, which they forecast as a 0.5% boost by the end of 2026. By the end of 2027, they expect only a 0.1% boost to PCE inflation from AI as memory and computer price growth slows.

“Even if we took all of the AI impact at face value and assumed instead that it would persist next year, we would still expect core PCE inflation to fall meaningfully toward the 2% target,” they write, pointing to the fading impact of tariffs and the Iran war energy shock.

For more on AI and inflation, read Morningstar chief US economist Preston Caldwell’s take.

What to Expect from Big Tech Earnings

Big Tech stocks carried the market to record highs in recent weeks. Now, their earnings may determine whether the rally continues. Investors will watch two key metrics in hyperscaler earnings reports coming over the next few weeks, according to Morningstar equity analyst Malik Ahmed Khan.

The first is cloud growth at Microsoft MSFT, Alphabet GOOG/GOOGL, and Amazon AMZN. Last quarter, all three reported accelerating cloud revenue growth, and investors are hoping for a repeat. Microsoft forecast its Azure revenue growth would accelerate to 45% from 42% in the prior quarter. Neither Alphabet nor Amazon provided cloud growth forecasts, but Khan expects their revenue will get a boost from custom chip sales.

The second metric is capital expenditures. The hyperscalers are on track to spend more than $750 billion on capex this year, about double their 2025 spending. Khan expects the hyperscalers to provide “directional commentary on next year’s capex,” giving markets an idea of the trajectory of AI spending.

Whether cloud growth and capex meet expectations could have a massive impact on the stock market broadly. Investors are nervous about whether AI investments will pay off. They worry that hyperscalers will overbuild, causing compute prices to plummet and saddling the cloud giants with unused capacity. They also fear that frontier labs OpenAI and Anthropic won’t have the cash to make good on their spending commitments, which account for a large chunk of hyperscaler backlogs. For those reasons, “the market is pretty negative [on capex],” says Khan.

However, hyperscalers could justify high capex by proving that they’re seeing a return on investment. For Meta, that could mean showing that users are regularly engaging and making transactions with its Muse AI agents. For the other hyperscalers, cloud growth is the clearest evidence of ROI.

If hyperscalers can’t convince investors their AI spending is wise, other stocks will suffer. “The overall AI trade could materially be thrown off if these cloud businesses don’t actually show returns,” says Khan. Chip, power, and certain software stocks would all be at risk. “Everything that has run up because of AI, all of that is counting on demand being real.”