A re-rating of the AI trade is underway in US equities. That process has driven the Nasdaq 100 to its worst monthly performance since April 2025. Investors are less worried about headline earnings misses than about rapidly rising AI costs that are eating cash flows. The prevailing behavior: sell first, ask questions later, especially with US midterms looming.
Since April 2009, the equal-weighted S&P 500 has rarely outperformed the cap-weighted index by as much as it has in October. The gap between the equal-weighted index and the Nasdaq 100 helps explain the structural shifts happening in equities today. In prior sell-offs, both the tech index and both versions of the broad index fell in tandem. Today, we see divergence.
Dynamics of Nasdaq 100 and S&P 500 Equal Weight Indices
This market move is not primarily about macro prints or Fed policy. It is a rotation — money leaving mega-cap techs into names that can benefit from continued US economic strength.
Politics is accelerating the process. Rising odds of a Democratic victory in the midterms are putting pressure on the USB-linked basket (a proxy for Republican-favored equities), which is heavily weighted toward tech names. Fears that a blue wave would bring tougher AI regulation and obstruct Trump's pro-growth agenda (including tax cuts) have triggered the selling.
S&P 500 vs. USB basket dynamics
Nevertheless, bulls remain optimistic. Morgan Stanley notes a cluster of downside risks — the midterms, stress from rising AI expenditure, and liquidity tightening — that could knock the S&P 500 about 9% from record highs. Yet their message is also pragmatic: investors should not panic — buying the dips once the noise subsides will be the rational move. In their view, US equities can still perform well over time regardless of midterm outcomes.
Wells Fargo is more cautious. The bank points to a fall in corporate earnings growth from 32% in Q2 to 26% in Q3 amid higher rates, tariff pressures, and expensive oil. While still historically elevated, the slowdown in earnings growth is a warning sign for the S&P 500.
The key risk event remains the US midterms. Will markets revert to the pattern of "sell the rumor, buy the fact"?
Technically, the S&P 500 failed to hold fair value on the daily chart, which invited short positions as expected. Immediate resistance sits near 7,645. As long as the price remains below that level, the bias favors selling the broad index.