AI dip-buying trade fails this time? Tech stock earnings blowups met with harsh punishment as US stock volatility jumps.

In the US stock market, equity investors are meting out one of the harshest punishments on record to companies that miss earnings expectations, while strategists warn that profit growth may have already peaked. Missing expectations comes at a price: the communication services sector's selloff is the steepest since 2019 Amazon.com, Inc. (AMZN.US) fell on Friday, becoming the latest company to suffer a sharp post-earnings selloff, and the rout in AI-related stocks dragged the major benchmarks to their worst day since June. A day earlier, Alphabet Inc. Class C parent Alphabet (GOOGL.US) posted disappointing results and its shares suffered their largest drop on record. Investors in the communication services sector are now punishing earnings misses more severely than at any time since Bloomberg began collecting the data in 2019; the same dynamic is playing out in the heavily weighted technology sector. Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the market is "much more sensitive than usual," with investors preferring to sell first and ask questions later rather than get trapped and absorb further losses. Earnings growth is decelerating Strategists at firms from Wells Fargo & Company to Franklin Templeton have in recent weeks forecast that corporate earnings expansion for the S&P 500 will slow as rising interest rates, tariff pressure and elevated oil prices weigh on results. With about one-third of the earnings season completed, those forecasts are being validated: data show earnings growth has slipped to about 26%still high by historical standards, but below the 32% in the second quarter. The deceleration is led by the market's largest sectors. Data show technology sector profit growth is expected to fall to 65% in the third quarter from nearly 77% in the prior quarter; the communication services sector is likewise expected to drop to just 3.2%, down from close to 10%. More troublesome is the difficulty of beating expectations: the share of S&P 500 companies outpacing Wall Street estimates is at its lowest level this year, and that is true across multiple sectors including technology, consumer discretionary and financials. Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services, said: "If 50% of the market is concentrated in these two sectors, people are going to demand something extrathey need more evidence that this trade still holds." Slowing growth is challenging that narrative. The fact is, only technology and communication services are down this month; every other corner of the market is rising. The climax of a three-week selloff: Nasdaq 100 falls 3.5%, Intel Corporation (INTC.US) posts its biggest drop in more than four decades This three-week rout, DRIVE reflects growing anxiety over whether the technology can generate profits sufficient to support a debt-fueled investment boom. Friday was its climax: the Nasdaq 100 fell 3.5%, its deepest one-day decline since early June. Intel Corporation plunged 29% on weak sales guidance, its biggest drop in more than four decades, dragging down other chipmakers including NVIDIA Corporation (NVDA.US) and Broadcom Inc. (QCOM.US). Amazon.com, Inc. and Alphabet both felleven as their core businesses cool, they are sticking with aggressive AI spending plans. As losses widened through the day, the declines weighed on other major indexes and money flowed to traditional havens. The three major US indexes all closed lower: the Dow fell 1.09%, the S&P 500 fell 1.82%, the Nasdaq Composite fell 2.86%, and the Philadelphia Semiconductor Index fell 7.2%; Intel Corporation fell 28.58% on the day, its biggest one-day drop in more than four decades. Closing losses were smaller than intraday lows, but the S&P 500's intraday drop of as much as 2.5% showed the selling pressure was broad-based. Eric Beiley, executive managing director of wealth management at The Beiley Group under Steward Partners, said: "These swings are scaryit shows there is a lot of risk in the stock market." The firm has been hedging chip stock exposure and buying healthcare and consumer company shares. "Investors are getting more nervous, unsure whether AI spending will really pay off." Volatility: VIX hits highest since April US options volatility surged on Friday. The Cboe Volatility Index (VIX) touched its highest level since April intraday as investors rushed to buy protection against further declines in the S&P 500the benchmark fell as much as 2.5% to 7,527 points. Earlier selloffs this month were concentrated in the tech-heavy Nasdaq 100, while Friday's decline spilled over into a broader set of stocks. Demand emerged for hedging entire portfolios, with VIX call options in particular pushed higher by buying. A bad day for tech stocks is usually good for value sectors such as consumer staples; but on Friday, stocks across the board moved more in sync during the selloff. "Once the S&P 500 broke below 7,600, that rotation trade seemed to break down a bit," said Brent Kochuba, founder of options research firm SpotGamma. "We're now getting a proper selloff." Another detail is that volatility had been severely underpriced: since the fragile US-Iran ceasefire in April, stock market volatility had been suppressed relative to other assets such as rates. Before Friday's open, even though futures pointed to a sharply lower open for stocks, the S&P 500 options market priced only a fairly calm 0.5% move. "Before today's event, S&P volatility was really underpriced," Kochuba said. This time, the buy-the-dip trade didn't deliver Fear over tech stocks is not new, and past pullbacks rewarded the "buy the dip" mentalitychipmakers benefiting from AI spending bounced back time and again. But since the Nasdaq 100 began another leg lower early this month, that has not happened: rising interest rates are squeezing companies and amplifying concerns over whether AI can deliver the expected profit bonanza. The cost is already showing up in performance. From the start of this month through last Friday, hedge funds lost 3.3%, with long-short portfolios posting their worst performance relative to the market since early 2021 (client data compiled by JPMorgan). Still, retail investors keep buying the dip. The Direxion Daily Semiconductor Bull 3X ETF (SOXL), which offers triple daily returns on a chip index, attracted a record $7 billion of inflows this month; ProShares UltraPro QQQ (TQQQ), which similarly tracks the Nasdaq 100 with triple leverage, drew $2 billion. Alexander Altmann, head of global equity tactical strategy at Barclays, said: "It's hard to shake retail out of positions in the short term, because buying the dip has clearly been the right trade. You need to see some structural shift in behavior, and that shift is driven more by the economic backdrop than by the market itself. If people start losing their jobs, that's usually when retail behavior changes." The return of diversification: 60/40 turns positive, equal-weight posts best run since 2009 Diversification strategies that were set aside amid the rush into tech stocks are now getting a new lease on life. Treasuries and investment-grade bonds, defensive stocks and commodities combined posted their best monthly return since late 2020. Mark Freeman, chief investment officer at Socorro Asset Management, said: "Momentum investing works both waysespecially when it is over-owned, as is the case now. With yields rising, investors now have options beyond stocks." Specifically, a 60/40 stock-bond portfolio returned more than 1% this month, helped by the resilience of fixed income; the largest ETF tracking long-duration Treasuries (TLT) rose more than 5%, its best monthly performance in more than a year. Within equities, utilities and consumer staples, seen as less sensitive to economic swings, led the way, each rising more than 10% in October; the equal-weight S&P 500, which treats Meta and Fox alike and strips out the outsized influence of large companies, rose nearly 5%, posting its best single-month outperformance versus the cap-weighted version since 2009. Energy stocks rose with crude oil prices, providing an additional buffer. Another risk-off signal: lower-volatility stocks outperformed higher-volatility stocks by the widest margin since 2002. Semiconductor stocks led the technology sector's October decline, and both Alphabet and Meta reported negative free cash flow, highlighting the risk of companies taking on heavy debt to compete for AI dominancewhich will drive global bond issuance to a record high in 2026. Sarah Ketterer, chief executive officer of Causeway Capital Management, said: "Investors are uneasy because the promise of free cash flow is now further away." But truly uncorrelated assets are hard to find Diversifying entirely away from AI is not easy. In recent years, speculation about AI's impact has reshaped the stock market: it has lifted the expected winners while hammering established software companies seen as losers. Even Treasuries may have been affectedthe flood of corporate bond issuance is competing with the US government for investors' cash. Jack Janasiewicz, portfolio manager at Natixis Investment Managers, said all of this makes it difficult to find assets that are truly diversified and not in some way swayed by AI sentiment. "Positive correlation is one thing, negative correlation is another. But what you really want is zero correlation, because that means assets can each rise on their own and go their separate ways. Making sure we have a better balance between AI and non-AI trades is one of the biggest issues we've had to deal with in the past few months." The year after the peak is what matters For bulls, the framework is not about "whether we've peaked." Research estimates that S&P 500 earnings growth will be closer to 20% from 2027 through the first quarter of 2028. Jeff Schulze, chief investment strategist at the Franklin Templeton Institute, noted that this level is above the 10% threshold historically needed for "markets to keep rising after growth peaks." "What matters more than the earnings peak is what your earnings growth rate is in the year after the peak," Schulze said. He said that under this outlook, "if we simply deliver on the current market earnings expectations for 2028, the S&P 500 could deliver high-single-digit to low-double-digit returns in 2027." Kimberly Forrest, chief investment officer at Bokeh Capital Partners, said investors are "trimming some of the excess gains in tech stocks" and rotating into other cheaper stocks, rather than retreating entirely from a stock market that will still deliver earnings growth (albeit at a slower pace). Zaccarelli's warning was more direct: "If earnings in a particular area come in below expectations, I think you'll see rapid repricing across all related areas."