Investors pivot to defensive stocks as tech selloff deepens

Investors are pivoting from technology stocks into defensive sectors as markets enter a “state of alert” amid renewed volatility in the tech-heavy indexes, CNBC reported.

The Nasdaq Composite is down 0.7% for November after dipping into correction territory last week. The index gave up 5.3% in October, and while it has staged a partial recovery, it remains under pressure from concerns about artificial intelligence spending, financing, and the economic outlook.

The MSCI World Information Technology index lost 7% in October and has shed a further 4.6% so far in November. At the same time, defensive sectors including healthcare, consumer staples, and utilities have seen broad gains.

The scale of the rotation

The rotation is pronounced. AJ Bell’s analysis of 11 super-sectors in the S&P Global 1200 shows that information technology went from being the best-performing sector in the first half of 2026, with a 28.4% rise, to the worst performer in the second half, tumbling more than 11%.

Healthcare and consumer staples have been the best performers in the second half, after energy, which has benefited from surging oil prices due to the U.S.-Iran war. Industrials have been weak, reflecting concerns about the economic outlook for next year.

The pattern is global. South Korea’s Kospi, heavily exposed to semiconductors, lost 16.2% in October and is down more than 8% month-to-date. The MSCI U.S. IT index is down 11.5% since October. The selloff is not isolated to one market or one set of companies.

The AI spending concern

The core concern is artificial intelligence capital expenditure. Tech companies are spending hundreds of billions on AI infrastructure, and investors are questioning whether the spending will generate returns. The concerns are about cash flow, debt, and what HSBC calls “circular financing,” where AI companies buy from each other, inflating revenue.

The Democrats’ sweep of Congress in the midterm elections amplified the pressure. A Democratic Congress is more likely to regulate AI and to investigate the spending patterns of the largest tech companies. The political environment has added a risk premium to a sector already under pressure from valuation concerns.

The Nasdaq is still up 8.7% year-to-date, but the gains are concentrated in the first half. The second half has been a story of erosion, and the question is whether the November correction is a buying opportunity or the start of a larger selloff.

Analysts say rotation is overdone

Alastair Pinder, HSBC’s head emerging markets and global equity strategist, said in a Monday note that recent moves in stock markets had been “vicious, and in our view, overdone.” He pointed to U.S. semiconductors trading on a 12-month forward price-to-earnings ratio of 13.5 times after a 45% de-rating since June.

“The rotation into defensives looks extreme,” Pinder said. “Walmart trades on 40x forward earnings, near a record high, while Nvidia trades on 13x, near a record low.”

The valuation gap is the argument for a reversal. If Nvidia’s earnings grow as analysts expect, the stock is cheap at 13 times forward earnings. Walmart at 40 times is expensive for a company growing at a single-digit rate. The market is pricing Nvidia as if the AI spending will not pay off, and Walmart as if defensive positioning will continue indefinitely.

Russ Mould, investment director at AJ Bell, described equity markets as being “in a state of alert, judging by how investors are rotating their sector exposures.” He noted that the movement can help stock pickers, given the adage that “a bad stock in a good sector will outperform a good stock in a bad sector.”

What I think

The rotation is real but the valuation argument is strong. Nvidia at 13 times forward earnings is cheap by any historical standard, and Walmart at 40 times is expensive. The market is making a bet that AI spending will not generate returns and that defensive stocks will continue to attract money. That bet is not obviously correct.

The AI spending concern is legitimate. Tech companies are spending at a rate that requires revenue growth to justify, and if the revenue does not arrive, the stocks will fall further. But the spending is also creating infrastructure that will be used for years, and the companies doing the spending are the ones with the strongest balance sheets. The risk is not that they cannot afford the spending; it is that the spending will not translate into earnings growth as quickly as investors want.

The political pressure from the Democratic Congress is a real factor. Regulation could slow the AI buildout, and investigations could create overhang. But regulation is slow, and the AI spending is happening now. The market may be overpricing the regulatory risk, just as it overpriced the antitrust risk for big tech in previous cycles.

The stock market has a history of rotations that go too far in both directions. The tech selloff of 2022 was followed by a massive rally in 2023 and 2024. The defensive rotation of 2026 could be followed by a reversal if the AI revenue materializes. The question is timing, and the market is not good at timing.

Pinder’s point about the 45% de-rating since June is the one that should make investors pay attention. A de-rating of that magnitude prices in a lot of bad news, and if the bad news does not arrive, the stocks bounce. The defensive stocks that have absorbed the rotated money are priced for perfection, and any disappointment will send them back. The extreme rotation is the setup for a reversal, and the reversal could be violent.