Wealth managers advocate stock diversification after AI selloff

The eagerness of managers to buy on weakness helps account for the speed of Monday's recovery. It also indicates that declines in AI stocks will continue to attract buyers, unless state-level restrictions on data centres prove more significant than anticipated. The decline in bond yields during the selloff signals looser financial conditions, which benefits the broader equity market rather than just the concentrated mega-cap trade. The push for diversification suggests capital could shift toward small-cap stocks, emerging markets, infrastructure and shorter-duration credit, potentially broadening market leadership even if headline tech indices recover. Texas data centre policy represents the primary risk to that outlook.

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Wealth managers view last week's AI selloff as a clearing of crowded trades, not a conclusion to the AI cycle, and they recommend broadening investments.

Summary:

• Wealth managers broadly remain constructive on equities after Thursday's selloff, seeing a reset in crowded AI positioning rather than a lasting downturn
• The S&P 500 fell 4.4% and the Nasdaq 5.5% on Thursday, with the Philadelphia Semiconductor Index down about 12% and around 38% below its June level
• Some managers see the federal political risk as overstated, with state curbs such as those in Texas the more tangible threat to data centre growth
• Falling bond yields were read as a sign of contained inflation and slower but sustainable growth, not recession
• Diversification is the common advice: small caps, emerging markets, infrastructure, asset-backed securities and shorter-duration credit
• The views were gathered before Monday's rebound in US stocks

After last Thursday's pronounced decline in US technology equities, wealth managers are mostly maintaining a positive outlook on stocks. Their view is that the drop represented a recalibration of overcrowded positions rather than an interruption to the AI investment narrative. Their consistent recommendation is that investors should diversify rather than pull back. These assessments were collected prior to Monday's US stock market recovery.

The selloff was sparked by worries that Democratic advances in the US midterm elections might result in stricter AI regulation and new constraints on data centre construction, impeding the infrastructure expansion. It reversed an initial post-election rally. On Thursday, the S&P 500 dropped 4.4% and the Nasdaq lost 5.5%. The Philadelphia Semiconductor Index declined roughly 12%, bringing its drop since June to approximately 38%. The pressure persisted into Friday, with tech-heavy North Asian markets leading the declines.

A number of managers view the political risk as exaggerated. One observed that AI continues to enjoy bipartisan backing as a strategic priority and that any federal restrictions would likely encounter a presidential veto. According to this perspective, the more immediate risk comes from states like Texas limiting new data centre projects. This would slow expansion at the edges without stopping it entirely.

Other managers pointed to bond market signals. Yields have continued to drop throughout the equity selloff. One manager interpreted that as indicating inflation concerns remain under control and that the bond market is pricing in slower but sustainable growth, not a recession. That firm described corrections of this magnitude as chances to increase exposure and stated it had already adjusted its portfolio.

Diversification emerged as the central theme. Advisers pointed to global small caps, emerging markets, infrastructure, asset-backed securities and shorter-duration credit as areas that either held up better or provide different return sources. One investment chief said his firm had been reducing its overweight position in US mega-cap technology throughout the year in favour of an equal-weighted index. He contended there is no technology bubble to burst, just a widening of returns to other stocks.

In Asia, analysts expect near-term volatility as markets assess possible delays to US data centre construction. Over time, they argue that compute capacity can move abroad, potentially aiding Asian supply chains, while China builds its own AI ecosystem. Some see the selloff as having pushed quality stocks below what their fundamentals warrant, creating opportunities for active investors.

One manager offered some perspective: this is approximately the fifth sharp decline in AI-related stocks in the past 12 months, and the sector has bounced back each time. Monday's rise will be an early test of whether that pattern continues.