To The Moon

October delivered an important reminder for investors: the stocks leading the market higher are not necessarily the stocks that will protect portfolios when sentiment changes.

For much of 2026, the AI trade has dominated market performance. Semiconductor stocks, technology leaders and companies connected to data centre spending attracted significant capital as investors anticipated years of growth from artificial intelligence.

But October changed the mood.

The S&P 500’s information technology sector fell 6.8%, its worst monthly performance since March 2025. The Nasdaq Composite dropped 5.3%, while the PHLX Semiconductor Index lost more than 15%.

Even momentum-focused ETFs were hit hard. The Invesco S&P 500 Momentum ETF (SPMO) declined 10.1%, while the iShares MSCI USA Momentum Factor ETF (MTUM) fell 10.5%.

The message is becoming clearer: investors are no longer willing to reward growth at any price. They are paying closer attention to cash flow, debt levels, earnings quality and valuations.

1. The market is starting to question the return on AI spending

One of the biggest concerns behind October’s technology sell-off is the enormous amount of money being committed to AI infrastructure.

Companies are investing billions in data centres, specialised chips, networking equipment and computing capacity. The long-term opportunity is substantial, but investors are increasingly asking when these investments will translate into stronger profits and free cash flow.

Revenue growth alone may no longer be enough to justify higher valuations.

For companies building AI infrastructure, the market wants evidence that customer demand can support the spending. For the major cloud providers, investors want to know whether AI services can generate attractive returns on the capital being invested.

This does not mean the AI opportunity has disappeared. It means the market is becoming more selective about which companies are positioned to benefit and which may struggle to justify their investment commitments.

2. Quality stocks are attracting attention

One of the clearest October trends was the relative resilience of quality-focused investments.

The iShares MSCI USA Quality Factor ETF (QUAL), which focuses on companies with characteristics such as stable earnings and lower debt, gained 0.1% during the month while technology and momentum-focused investments declined.

Quality stocks are attractive for a fairly simple reason.

Companies with consistent earnings, manageable debt and reliable cash generation are generally better positioned to withstand economic uncertainty.

They may not deliver the fastest growth during a speculative rally, but they can offer more predictable financial performance when investors become nervous.

This is particularly relevant when borrowing costs remain a concern. Companies that depend heavily on external financing or future capital raises can become more vulnerable when interest rates and financing costs rise.

I think this is an important distinction: investors are not necessarily abandoning growth. They are looking for growth supported by stronger balance sheets and actual cash generation.

3. Consumer staples are having an unusually strong month

Another interesting development was the rally in defensive sectors.

The Consumer Staples Select Sector SPDR ETF (XLP) surged 10.9% in October, recording its largest monthly gain since it began trading in 1998.

Its major holdings include Walmart, Costco and Procter & Gamble.

These businesses sell products people continue to purchase regardless of whether the economy is expanding or slowing. Groceries, household essentials and personal care products are not easily eliminated from household budgets.

Healthcare and utilities also attracted investor interest as money moved towards traditionally defensive areas.

However, I would be cautious about chasing this rally.

Consumer staples have already gained almost 16% in 2026, and the recent surge has raised valuation concerns. A defensive business is not automatically a good investment at any price.

Walmart, Costco and Procter & Gamble have different growth profiles and valuations. Investors still need to consider earnings expectations and the price they are paying.

The lesson is not to buy every defensive stock simply because technology is falling.

4. An overlooked signal: the average stock is performing better

Perhaps the most interesting figure in the article is the performance of the Invesco S&P 500 Equal Weight ETF (RSP).

While the traditional S&P 500 fell 0.9% in October, RSP gained almost 5%.

This difference matters because the traditional S&P 500 gives greater weight to its largest companies. A relatively small group of mega-cap stocks can therefore have a significant influence on the index’s performance.

The equal-weight version gives each constituent a more balanced allocation.

When RSP outperforms the traditional index, it suggests that market performance is becoming less dependent on a handful of large companies.

I see this as a potentially encouraging development.

A healthier market rally would ideally involve participation from more sectors and companies, rather than relying almost entirely on a small group of technology leaders.

If this trend continues, investors may find opportunities outside the familiar AI and mega-cap technology names.

5. Where could investors look next?

I would divide the current opportunities into three areas.

Quality businesses: Companies with consistent earnings, strong balance sheets and reliable free cash flow. QUAL is one ETF worth examining for investors who want exposure to this investment style.

Defensive sectors: Healthcare, utilities and consumer staples may provide some stability if economic concerns increase. However, valuation discipline is particularly important after October’s strong performance in staples.

Broader market exposure: RSP offers a different way to participate in the S&P 500 by reducing the dominance of its largest constituents. It could benefit if market leadership continues to broaden.

I would not completely write off technology either. Some of the strongest businesses in the sector have substantial cash reserves, established customer relationships and the ability to fund investment internally.

The recent sell-off may create opportunities, but the distinction between companies with strong financial foundations and those relying heavily on future expectations will become increasingly important.

My takeaway

October may represent a change in market leadership rather than the end of the AI investment cycle.

For a long time, investors were rewarded for owning the fastest-growing stocks. Now they are asking tougher questions about profitability, free cash flow, debt and valuation.

I think this is a sensible shift.

AI remains a major long-term opportunity, but a company spending billions on infrastructure is not automatically a winner. The businesses that ultimately benefit will need to demonstrate that their investments generate sustainable returns.

Personally, I would rather see a portfolio supported by a combination of quality growth companies, reliable cash generators and broader market exposure than depend entirely on a handful of high-momentum technology stocks.

The biggest opportunity may not be predicting which AI stock rebounds first. It may be recognising that market leadership is changing and looking beyond the stocks that dominated the previous rally.

For discussion purposes only, not financial advice.