Tech's 6.8% October Slump Sends Smart Money Into Staples and Quality

The S&P 500's information-technology sector dropped 6.8% in October, its worst month since March 2025, FactSet data showed, as fears over shrinking free cash flows and rising borrowing costs broke the artificial-intelligence trade. Investors responded by rotating into defensive sectors and high-quality stocks, and the moves were dramatic.

The proof sits in the momentum funds. The Invesco S&P 500 Momentum ETF, whose portfolio leans heavily on tech, lost 10.1% in October. The iShares MSCI USA Momentum Factor ETF fell 10.5%, according to FactSet data.

Where is the money going now?

"We're buying quality," said Jeff Buchbinder, chief equity strategist at LPL Financial, in a phone interview. "When you buy quality products, you are getting a little bit of a value tilt, and you're getting a little bit of underweight to the AI trade, particularly to the lower-quality segment of the AI trade."

Marta Norton, Empower's chief investment strategist, also backed quality stocks, citing their "lower levels of debt, consistent earnings streams and a measure of growth embedded in the revenue profile."

The iShares MSCI USA Quality Factor ETF, which targets U.S. stocks with stable earnings and low debt, ended October with a 0.1% gain, FactSet data showed. The tech-heavy Nasdaq Composite fell 5.3% in the same month — also its worst performance since March 2025, according to Dow Jones Market Data.

Which sectors rallied?

Defensive sectors ran hard. The State Street Consumer Staples Select Sector SPDR ETF, whose top three holdings as of Thursday included Walmart, Costco Wholesale and Procter & Gamble, soared 10.9% in October. That was its largest monthly gain since it began trading in 1998, according to Dow Jones Market Data.

The State Street Utilities Select Sector SPDR ETF and the State Street Health Care Select Sector SPDR ETF also saw enormous rallies in October. Investors sought shelter in Treasury bonds at the same time.

Consumer staples tend to fare relatively well when the economy slows because people keep buying soap, toothpaste and shampoo. Russell Price, chief economist at Ameriprise Financial, told MarketWatch by phone that discretionary purchases risk falling off if a big stock-market drawdown makes consumers worry about their wealth — even though spending has held up despite sticky inflation.

Consumer staples are "a safer place to be within the equity market," said Norton, "as there's just not a whole lot of earnings volatility there." She cautioned, though, that the sector now looks "overvalued" after the surge.

How bad was the AI unwind?

The S&P 500's consumer-staples sector has gained almost 16% this year after its October spike, according to FactSet. Tech has still done better in 2026 — up around 19% — despite the October selloff in chip stocks.

The PHLX Semiconductor Index plunged more than 15% in October. Intel's shares plummeted 28.6% on Friday alone after its quarterly earnings report disappointed investors.

The Roundhill Magnificent Seven ETF, whose holdings include Amazon, Nvidia, Google parent Alphabet, Microsoft, Facebook parent Meta Platforms and Tesla, dropped 4.5% in October, according to FactSet. Amazon's quarterly results added to Friday's Big Tech pressure.

Norton said the hyperscalers in that group sit at the center of "the AI storm," but they've appreciated less than hot chip stocks, making them less vulnerable to a pullback. The market, she argued, is "calling the wrestling match after the first takedown instead of waiting to see how it plays out over time." She added: "I don't think we know who the winners and losers are because we don't know exactly how customers and enterprises are going to change their behavior and interact with AI."

What held up while the indexes fell?

The average stock kept winning. The Invesco S&P 500 Equal Weight ETF rallied almost 5% in October and closed Friday with a fourth straight week of gains, according to FactSet data. The cap-weighted S&P 500 lost 0.9% for the month, falling for a third consecutive week and trimming its 2026 gain to 10.7%, according to Dow Jones Market Data.

The divergence sets up a clear test for November: whether AI-driven mega caps resume leadership, or the October rotation into quality, staples and equal-weight breadth marks a durable regime change.