Beyond Big Tech: October Inflation Tests the Market Rotation

By Daniel Okafor

What has broadened beyond the chip trade?

MarketWatch reported that the equal-weighted S&P 500 outperformed its market-cap-weighted counterpart by the widest margin since 2009 over the past month, as a sharp chip-stock selloff dragged on the market’s largest weights.

MarketWatch said the reversal followed a stretch in which chip stocks powered the broader market higher for most of 2026. Concern over the cost of the massive artificial-intelligence buildout, and whether that spending will pay off, has since pressured chip shares.

Over the past month, healthcare, consumer staples, real estate and materials posted strong gains, according to MarketWatch. The information-technology and communication-services sectors, both AI-related, were hammered over the past 30 days.

“Information technology has gone from penthouse to outhouse, and slumped from being the best performer to the worst,” said Russ Mould, investment director at AJ Bell, describing the shift since the first half of 2026. Mould also said energy, consumer staples and healthcare had remained resilient.

Why are investors rotating now?

MarketWatch said last week’s midterm elections gave Democrats control of the Senate, House and many state offices. The result raised concerns about tougher AI regulation and new hurdles for data-center development when the winners take office in early 2027.

“Nagging worries” about next year’s economic outlook, and about whether “air is leaking out of an AI trade,” could explain the rotation, Mould told MarketWatch on Monday. Mould said AI-trade concerns appeared to be playing a larger role than the broader economic outlook.

MarketWatch said Tuesday’s October consumer-price index report and a heavy lineup of Federal Reserve speakers this week would put the macroeconomic backdrop back in focus. Another interest-rate hike in December remained on the table.

What will October inflation show?

MarketWatch said oil prices remained elevated because of the Middle East conflict. The report listed these October forecasts:

• Headline CPI: expected to rise 0.3% from the prior month.
• Core CPI: forecast to rise 0.2% from the prior month, excluding volatile food and energy prices.

FactSet put the median estimate for annual headline CPI at 4.0%, up from 3.7% in the previous month. The Bureau of Labor Statistics will not publish an annual October inflation rate because last year’s government shutdown disrupted the underlying data, according to MarketWatch.

The CME FedWatch Tool showed Monday odds above 83% for a December rate increase, according to MarketWatch. An upside inflation surprise could raise those odds, while the pricing left room for further tightening in 2027.

How could rates change the winners?

Mark Hackett, chief market strategist at Nationwide’s Investment Management Group, said: “The rate environment has been an under-discussed driver of this rotation trade.” He said a hotter-than-expected inflation print and aggressive Federal Reserve speakers would push investors farther out of technology and into other parts of the market.

MarketWatch explained the mechanism. Higher rates reduce the value of future profits and raise borrowing costs. Hyperscalers that carried almost no debt in the past few decades raced to borrow during the past year to finance chips, data centers and computing infrastructure.

“Because there’s a nervous investor base right now, the tech companies are going to be the more reactive sector [to inflation data],” Hackett said. “So, if inflation is elevated, there will be a knee-jerk selloff in tech,” he predicted.

Is this a rotation or an exit?

Investors have not pulled money out of the stock market altogether, Hackett said. Many investors selling tech stocks have looked for opportunities elsewhere, and that search helped drive Monday’s rebound.

Hackett said:

People are starting to “realize that there’s a whole lot of other companies out there, and by the way, these are the companies that are now benefiting from AI and developing these AI capabilities.”

He said those investments were beginning to translate into productivity gains and accelerating profit margins, creating potential opportunities outside the technology sector.

FactSet data showed broad gains on Monday:

• Dow Jones Industrial Average: up more than 1,200 points, or 2.4%.
• S&P 500: up 2.5%.
• Nasdaq Composite: up 2.9%.

The Dow’s 2.4% rise nearly matched the S&P 500’s 2.5% gain.

What could break the rotation?

Tuesday’s CPI report and the Federal Reserve speakers will test whether investors can absorb a higher-rate shock without retreating from equities. If inflation exceeds forecasts and the speakers sound aggressive, Hackett’s tech selloff scenario becomes more likely. A softer reading would shift attention back to the AI-driven productivity gains Hackett said were beginning to reach companies outside technology and could create new opportunities elsewhere.