Technology stocks and cryptocurrencies were sold off as the US market continued the "risk-off mode" that began this month.

The brief optimism brought about by the end of the U.S. government shutdown quickly dissipated. The market’s focus shifted to a large volume of delayed economic data, the uncertainty of Federal Reserve rate cut prospects, and concerns about overvalued tech stocks, resulting in widespread sell-offs of high-valuation tech stocks and risk assets.

On Thursday, October 13, investors accelerated their selling of high-flying momentum stocks this year and shifted to safer assets, causing risk asset prices to fall across the board and marking the largest single-day drop in U.S. stocks in a month.

The three major U.S. stock indexes fell collectively in trading that day. The tech-heavy Nasdaq Composite closed down 2.29%. Tech giants generally declined—Tesla fell 6.64%, Nvidia was down 3.58%. The deterioration in risk sentiment spilled over to the cryptocurrency market: Bitcoin dropped below the $100,000 mark and Ethereum plunged more than 10% at one point.

The immediate catalyst for this sell-off was a series of cautious comments from multiple Federal Reserve officials, hinting that rate cuts need to be approached carefully. According to CME data, the probability of a rate cut in the futures market plunged from over 70% a week ago to about 50%.

This shift intensified the market rotation already underway this month. Reports show that investors are taking profits from this year’s hottest stocks and turning to lower-valued, more defensive sectors, with this ‘risk-off mode’ clearly manifesting in Thursday’s trading.

Momentum Stocks and AI Favorites Take a Hit, Accelerated Market Rotation: Funds Flow Into Consumer and Healthcare Sectors

Amid an increasingly uncertain interest rate outlook, the momentum stocks and AI-related stocks that have been highly sought after this year became the hardest hit areas in the sell-off.

A basket of high-momentum stocks tracked by Bank of America fell 4.7% on Thursday, its worst single-day performance since April. AI-related stocks suffered especially severe declines: Nvidia dropped 3.58%, Broadcom was down 4.29%. Retail investor favorites weren’t spared either, as Citigroup’s U.S. retail hot stock portfolio plummeted 6%.

In the past three days, Mag7 constituent stocks have been hit much harder than other stocks in the S&P 500 index.

Nvidia, in particular, has been consolidating for most of the past four months, with investors digesting all AI-related news as the company is set to release its latest earnings report on November 19.

In addition, Cathie Wood’s ARK Innovation ETF and the VanEck Social Sentiment ETF both fell more than 5%. Goldman Sachs’ basket, which tracks stocks with market caps above $1 billion and are the most heavily shorted, also fell by 5.5%, showing that the sell-off is broad-based.

While U.S. markets are selling off large tech stocks, rotation and style shifts are accelerating, with funds clearly flowing into healthcare and consumer staples sectors.

Goldman Sachs’ trading division points out that hedge funds are currently using the healthcare sector to hedge against correlation risks arising from AI weakness. The Health Care Select Sector SPDR Fund (XLV) rose for the ninth consecutive trading day and again ranked as the day’s top-performing sector (except for energy). Hedge funds are actively buying stocks in this sector, but have yet to see long-term investors follow suit.

Siebert Financial Chief Investment Officer Mark Malek said:

You see people are still investing in stocks—but they are rotating out of those growth, high-valuation stocks into what might be seen as safer and cheaper ones.

Nevertheless, investors remain optimistic about the long-term prospects for AI-related stocks, but are concerned about their excessive short-term valuations, prompting some to take profits.

Rate Cut Expectations Waver, Fed Officials Turn Hawkish

Market reassessment of the interest rate path is the main driver behind this sell-off. Swap market traders now see about a 50% chance of a rate cut in December, down sharply from 72% a week ago.

Recent comments from several Fed officials have reinforced market caution. St. Louis Fed President Alberto Musalem said officials should be cautious about further rate cuts since inflation remains above the 2% target. Minneapolis Fed President Neel Kashkari said in an interview that he did not support the last rate cut and has not yet decided on the policy path for December. Cleveland Fed’s Beth Hammack also noted that monetary policy should remain “somewhat restrictive.”

Matt Maley, chief market strategist at Miller Tabak + Co., analyzed:

The promise of lower rates is why many investors are willing to overlook the high valuations of momentum stocks. Now that promise is less convincing, investors are cutting exposure to these expensive stocks.

Michael O’Rourke, chief market strategist at JonesTrading, also pointed out that if rates drop more slowly than expected, then stock P/E ratios will need to contract to reflect the new outlook, triggering more selling.

“Data Flood” Approaching, Market Braces For Impact

After the 43-day U.S. government shutdown ended, the market is facing another uncertainty: an impending “flood” of data.

Investors are worried that the large volume of delayed economic data could cause sharp market volatility and overturn previous investment decisions made with incomplete information. Mina Krishnan, Schroders Multi-Asset Portfolio Manager, said:

We’ve been in the dark for the past 40 days, and a huge influx of data is coming at once.

Although U.S. President Trump has signed a temporary funding bill, whether key economic reports (especially October jobs data) can be fully released remains in doubt. These data are crucial for the Fed to assess the labor market and inflation trends, and their results will directly affect future rates decisions, leaving investors braced for impact ahead of the releases.

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