AI Stocks Fall. Will Big Tech Keep Spending?
Tech stocks have had a rough few weeks, led lower by previous AI winners. We check in on some of those names following our June video on parabolic moves. We also discuss the biggest thing we’re watching this earnings season: big tech’s spending plans, with estimates calling for $1.1 trillion in capital spending in 2027.
We also look at what history tells us about investing at all-time highs and how higher mortgage rates are hurting housing, with pending home sales at their lowest level in 25 years. In rapid fire, we cover the 2027 Social Security COLA announcement, rising oil prices, and expectations for another Fed rate hike.
Video Recap
The full breakdown in written form
AI Stocks
The stocks that carried the AI trade for most of 2026 have done most of the falling this October. Volatility in this stretch of the calendar was no surprise to us. In our September 17 update we wrote:
The August through October window has been rough in seven of the last eight years.
The damage has landed hardest on the names that ran the furthest. In late June we published a video on how to spot parabolic moves and pointed to the chip stocks, Micron in particular, as a group that had gone close to vertical and deserved caution. The chart below tracks a dozen AI-related stocks from June 25, the day of that video, through October 20.
Micron is down 25.46% over that stretch and nearly 35% from its high. Western Digital, which makes the storage hardware AI data centers need in bulk, is down 47.59%. Intel has fallen 31.29% and Arm Holdings 35.93%.
The selling has spread well beyond the chip companies. Caterpillar, a supplier to the data center buildout, is down 31.79%, and GE Vernova, which makes power equipment, is down 16.44%. CoreWeave and Cerebras both came public to plenty of fanfare and have since fallen 39.81% and 27.61%.
IREN belongs to a group known as the neoclouds. These companies fill warehouse space with Nvidia chips and the power to run them, then rent that capacity out for AI computing. IREN climbed from about $10 to $80 in roughly a year and has since given back most of it, trading in the high $20s.
We take some comfort in how wide these declines have been. In late 1999 and early 2000, the market's biggest winners were not suffering drops of this size on the way to the dot-com peak. Investors today are judging these companies one at a time, and a market willing to cut a former favorite by 40% is a long way from the euphoria that defines a bubble.
Hyperscaler Spending
The number we will watch most closely this earnings season is how much the largest tech companies plan to spend on AI infrastructure next year. Amazon, Alphabet, Microsoft, Meta and Oracle, the companies known as hyperscalers, spent $411 billion on capital projects in 2025, most of it on data centers and the chips and power that go inside them. The chart below shows how far the estimates have climbed since.
Consensus estimates compiled by FactSet and Goldman Sachs put 2026 spending near $800 billion, a 95% jump, with another 38% increase to $1.1 trillion expected in 2027.
That $1.1 trillion is already built into analyst models and into the share prices of every company selling into the buildout. When these companies report third quarter results over the coming weeks, any sign that 2027 budgets are being trimmed would put real pressure on the chip, storage and power names that have done so well. Until we hear that, we read the October selling as investors repricing individual stocks after a hot run.
Our outlook for the next 6 to 12 months remains strong, and a weak October in tech fits the seasonal pattern we expected. A pullback like this is still a good moment to check how much of a portfolio has drifted toward the AI trade, since a few big winners can quietly grow into an outsized share of the total.
Investing at All-Time Highs
One of the most common questions we get when markets sit near record levels is whether new money should wait for a pullback. Longtime investors ask it, and so do people who have never owned a stock. Buying after a big selloff can be a smart move. The risk is in the waiting.
Lincoln Financial, using Morningstar data from January 1990 through June 2026, compared investing only on days the market closed at a new all-time high with investing on any day at all, including the days after big selloffs.
Money invested at a record high did better on average over the following one, three and five years. Five years out, the cumulative gain was 82.5% versus 75.4%. Records are also far more common than most people assume, with 789 of them since 1990.
History does not promise the next five years will look the same. The study does show that a new high, on its own, has not been a good reason to keep money on the sidelines.
Housing
Housing has been in a rough patch for a couple of years, and with 30-year mortgage rates near 7.5% it has gotten worse this fall. Over the last four or five years, every push above 7% has frozen buyers and builders alike. The NAHB/Wells Fargo Housing Market Index, which measures homebuilder sentiment, fell to 29 this month.
That is the lowest reading since 2012, when the recovery from the 2008 and 2009 housing crisis was just getting started. Builder sentiment slipped into the low 30s several times over the last five years without breaking below 30 until now. Pending home sales, which count signed purchase contracts before closing, point the same direction.
The pending home sales index came in at 66, the lowest reading since the series began in 2001. Until mortgage rates get back into the 6% range, we expect housing to stay a drag on the economy.
Rapid Fire
Social Security COLA. The Social Security Administration announced on October 14 that benefits will rise 3.6% next year. The chart below puts that number alongside the adjustments since 2020.
Before inflation took off, the increases were 1.6% for 2020 and 1.3% for 2021. They jumped to 5.9% and 8.7% for the next two years, then settled between 2.5% and 3.2% for 2024 through 2026. Retirees who have Medicare Part B premiums taken out of their checks should expect some of the raise to go to a higher premium, which is usually announced in November.
Oil. West Texas Intermediate crude climbed from about $85 to $104 over the last couple of weeks. The chart shows how wide this year's range has been, from a $115 peak in the spring to a $70 low around the start of July.
Until the conflict with Iran ends, oil looks stuck between roughly $80 and $110. Higher gas prices work like a tax on consumers, who have spent noticeably more at the pump this year than last.
Federal Reserve. The Fed raised rates in September, and the futures market now prices one more hike in December. Back in February, the same market expected the Fed to be cutting rates by year end.
We argued in our September 17 update that the September hike was a mistake, and we don't think a second one is warranted. As of mid-October, though, the market treats it as close to a done deal.
Have questions about how this affects your portfolio?
Reading past the headlines to the data underneath is the kind of analysis we bring to every Sentara Capital client relationship. If you'd like to talk through what these numbers mean for your own plan, we'd welcome the conversation.
Contact Us at (770) 509-5305 to Begin Your Journey
FAQ: AI Stocks and Big Tech Spending
What is hyperscaler capital spending?
Capital spending, or capex, is money a company puts into long-lived assets rather than day-to-day costs. For the hyperscalers it means data center construction, servers, AI chips, networking gear and the power contracts to run them. Each company reports capex every quarter and usually updates its full-year plan on the earnings call, which is why investors listen so closely to those calls.
Why do AI stocks fall when big tech cuts spending?
One company's capex is another company's revenue. A chipmaker, a storage maker or a power equipment supplier sells largely to the same handful of buyers, so a smaller budget at even one hyperscaler shows up directly in their order books. Share prices of suppliers tend to move on changes in those forecasts well before the actual orders change.
Should I invest a lump sum at an all-time high or wait for a dip?
Historically, investing the full amount right away has come out ahead more often than spreading it out, because markets rise more often than they fall. Spreading purchases over several months still has a place for someone who would find a sharp drop right after investing hard to live with, since sticking with the plan matters more than the entry point. The right answer depends on the household, including when the money will be needed.
When does the 2027 Social Security COLA show up in my check?
The increase applies to benefits for December 2026, which are paid in January 2027. People receiving Supplemental Security Income see it a little earlier, on December 31. The Social Security Administration mails notices of the new benefit amounts in early December and also posts them to online my Social Security accounts.
Can a higher Medicare Part B premium cancel out my COLA?
For most people with Part B deducted from their check, no. A rule known as the hold harmless provision keeps the premium increase from exceeding the dollar amount of the COLA, so the net benefit cannot fall. It does not protect higher-income beneficiaries who pay an income-related surcharge, or people new to Medicare.
What does the NAHB housing market index measure?
The index is built from a monthly survey of homebuilders, and 50 is the dividing line. A reading above 50 means more builders see sales conditions as good than poor, and a reading below 50 means the reverse. Builders also rate expected sales over the next six months and buyer traffic, so the index tends to turn before construction numbers do.
Another question? Call (770) 509-5305.
Click for Full Transcript
In today's market update, we are going to discuss the pullback in tech stocks. We are also going to go over the number one thing we are going to be looking out for in third quarter earnings season. And in the housing market, there is new housing data. We want to see what impact higher mortgage rates are having on the housing market. We've got all that and more. Let's dive into it.
Now, before I get into the update, just a heads-up, we are getting closer to 10,000 subscribers on YouTube. So, if you haven't hit subscribe before, we'd appreciate you helping us get there. And if you haven't been to sentaracapital.com, our website, in a while, we have made a lot of changes and have some really cool content there, including our investing page and our retirement page. By the way, speaking of retirement, just this past week we got the announcement on what the 2027 Social Security cost-of-living adjustment is going to be. We'll have that in rapid fire.
But let's start out by talking about tech stocks. It has been a rough October for this group. If you go back just a couple months, we highlighted that the period from August 1st to October 31st had been pretty volatile for the stock market over the last 10 years, and it would not be a surprise if we saw volatility continue. And that's exactly what has happened. A lot of the tech names have gotten hit, and it's been really focused on previous AI winners.
In fact, we have in front of you a lot of the big AI themes that earlier in the year were white hot. So white hot that in late June, we did a video talking about how to spot parabolic moves, and we mentioned a lot of the chip names, Micron being in that group, because they had gone up so much earlier in the year, and we said you had to be very careful with this group. From then until now, and we're filming this on October 20th, you can see Micron Technology is down 25%, and it's down almost 35% from its high, but it's done especially poorly here in the last four months. Western Digital is down 47%, and again, they make the chips that are for storage. If you are wanting AI compute, you need a lot of these. Intel is down 31%, ARM Holdings 35%. So those four are chip names in one way or another.
But notice on here, we also have names like Caterpillar down over 30%, and GE Vernova, which makes power equipment, down 16%. And then the bottom three names. CoreWeave and Cerebras were both IPOs, they came public to a lot of fanfare and a lot of hype, and you can see they have each had a big sell-off recently. And then down at the bottom is a group called the neoclouds. IREN is one of them. These are basically companies that rent out warehouse space. They have the chips from Nvidia, they get the power, and they rent out the space for AI compute. IREN went from $10 to $80 in about a year, and then it turned around and has gone from $80 into the high $20s.
So there was so much hype around a lot of these names earlier in the year. And in a way, a positive here is that a lot of these AI names having this kind of a decline kind of assures us that we are not in an AI bubble. Because during the dot-com bubble, you didn't have the big winners of that time having declines of this magnitude in late '99, early 2000. So this lets you know that investors are taking a look at each one of these companies and making decisions. There's not euphoria setting in where everything is being seen through rose-colored glasses.
All right, let's shift gears here and talk about the item that we are going to be watching the closest in third quarter earnings season. And that is going to be when we hear from the big tech names about their capital expenditure plans. We've talked about this all year. It has been amazing how much money has been spent by the hyperscalers, and we're talking here about Google and Meta and Amazon, etc. They spent $411 billion in 2025 building out their compute capacity. So these are buying data centers, buying chips from Nvidia, the spending needed for power. In 2026, we had nearly a 100% increase in spending, $800 billion being spent by these companies.
Now, here's the big question we want answered. Are they considering pulling back on their forecast for spending next year? Because right now, you can see spending is at $1.1 trillion. That's what's expected right now by investors and by analysts. What we are going to be watching closely is when these companies start to say that they are pulling back. That's when there is some major risk in some of the tech and AI winners that have done so well. So that's something we are going to be watching closely from these companies.
Now, also speaking of the stock market, the next chart we have for you really is pretty phenomenal. Quite often when the markets are near all-time highs, I'm asked by investors who have more money, "Hey, should I wait for a big pullback to invest this money?" I also hear from new investors who don't have any money in the markets, and they say, "Hey, should I wait and invest after a big sell-off?" And there's nothing wrong with investing after a big sell-off. That can be smart, but if you wait around, there is big risk here.
This is a study by Lincoln Financial. They went back from 1990 through June of 2026 and asked, if you invested only when the market was at a new all-time high, what would your average gains have been 1 year, 3 years, and 5 years later? That's in orange, versus if you invested on any day, which includes after big sell-offs. In brown are those returns going forward 1 year, 3 years, and 5 years. And it's pretty remarkable that investing at all-time highs has actually had better returns than investing on just any day. So this is pretty amazing, and it lets you know that if you have funds and you're holding out trying to time the market, that's generally not going to be a good idea. You can go ahead and invest now.
All right, let's look at the housing market. This is a key part of the economy that has been in a rough patch for a couple years now, and of late it's been problematic because mortgage rates are up to near 7.5%. We've seen over the last four or five years that when mortgage rates get north of 7%, it's a freeze for housing, and we have two sets of data that have come out in the last couple days that I thought were worth sharing.
The first is the NAHB Wells Fargo Housing Market Index. This is basically measuring homebuilder sentiment, and it came in at 29, which is super low. In fact, you have to go all the way back to 2012, just a couple years after the housing crisis of '08 and '09, early in the recovery, to find the last time sentiment was this low. And you can see there that over the last five years there have been a number of times sentiment got into the low 30s, but this is the first time it hit 29. So this is not good for the homebuilders currently. They are not feeling good with mortgage rates where they are.
We also got pending home sales. This is measuring contracts to purchase homes, so this is before you've closed on the house, and it came in at 66. You have to go all the way back to 2001, when this data set was created. This is the lowest reading in 25 years. So again, this is a part of the economy we want to see doing better, but until mortgage rates come back down into the sixes, it's going to be a tough haul.
Now it's time for rapid fire. This is when we talk about a couple charts we think you need to know about, and the first one is that Social Security 2027 cost-of-living adjustment we talked about. And we're not just going to tell you that number. We're going to give you what the adjustment's been over the last seven or eight years. Let's start on the far left side. Before inflation skyrocketed, in 2020 and 2021, you can see it was less than 2%, 1.6% and 1.3%. Then in '22 and '23, big spikes in inflation, so you can see the cost-of-living adjustments really went up there. But then in '24, '25, and '26, we've been between 2.5% and 3.2%. We just got 2027's number. 3.6% is going to be the increase. So a nice little increase there for retirees. I want to mention, though, if you are paying for your Medicare Part B coverage through Social Security, a lot of times that increase is going to come out of your raise. We're going to get that number sometime in November, but that's just something to keep in mind.
All right, next chart. We are going back to oil, and this is not a positive development, of course. We've kept track of oil all year long, and every time it starts going down, we hope that maybe it will not go back into the $90, $100, $105 range. But you can see over the last couple weeks oil's gone from $85 up to $104, which means gas at the pump is only going to go higher from where it is today. And it's clear that until the conflict in Iran is over, oil seems stuck in this range between $80 and, say, $110. It doesn't look like there's going to be an easy way out of that. And by the way, that's a big tax on consumers. Consumers have spent a lot of extra money on gas this year compared to where prices were last year.
All right, our last chart is just an update on the Federal Reserve. We got a rate hike in September that we talked a lot about, and the big question was, when's the Fed going to hike again? Well, as it stands right now, the market is pricing in a rate hike in December. You can see on the far right, in yellow and purple, the difference between October 15th and 16th. But basically, the market is saying we're going to get one more rate hike this year. We are in the camp that the Fed shouldn't have hiked rates in September, and you can go back and watch our video where we explained ourselves on that. So, needless to say, we don't think they should do a second hike, but it looks like it's pretty much set in stone.
Okay, so the key takeaways are that tech stocks are having a tough October, but don't be dismayed. That is not unusual for this time of year, like we have been talking about. The outlook over the next 6 to 12 months is still really strong. And then on housing, higher mortgage rates are really hurting the housing market, and until mortgage rates come back down, it doesn't look like things are going to get better anytime soon.
Listen, if you are new to Sentara Capital, we'd love for you to go to the website we talked about earlier. You can go to the contact page and reach out to us. We have a three-meeting process to see if we are a good fit. Thanks for watching and take care.
Comments