Stocks slid last week as Middle East tensions drove oil prices to a five-month high. Strategists say they still have room to rise. Plus, while individual investors may be succumbing to the AI jitters pressuring tech stocks, one strategist says those same stocks could be primed for a rebound.
In This Week’s Markets Brief
- Can the stock market handle even higher oil prices?
- The AI stock pullback may be nearing an end.
- Are retail investors losing their appetite for risk?
Are the Market’s Perma-Bulls Getting Scared?
Retail investors, the stock market’s most enthusiastic daredevils, are still up for risks, but their faith in AI has shown signs of waning, according to recent brokerage client trading data. Between Oct. 15 and Oct. 21, as AI spending concerns hammered semiconductor stocks, individual investors brushed those worries off and bought the dip. Inflows into technology sector exchange-traded funds were the second highest on record among JPMorgan clients, according to the firm.
Tech ETF inflows set a single-day record on Friday, Oct. 16, when retail investors scooped up semiconductor-focused funds as shares of giants like Advanced Micro Devices AMD, Micron MU, and Intel INTC fell close to 6%.
Retail investors even bought the dip in CoreWeave CRWV, the cloud computing provider at the center of the week’s AI selloff. Yields on CoreWeave’s 9.75% bonds jumped to nearly 15% on Oct. 14 as markets questioned the company’s ability to repay the debt it has accumulated to build AI data centers. Shares tumbled more than 15% on the same day, and they declined a further 6% through Oct. 21.
While individual investors bought CoreWeave shares when they first nosedived, that additional 6% tested their mettle. “The persistent decline prompted retail investors to pause ‘buy the dip’ purchases and begin trimming their positions,” according to JPMorgan analysts. CoreWeave shares continued to slide in the back half of last week, ending Friday at $54.24, its lowest closing price since May 2025.
Outside of CoreWeave stock, JPMorgan sees more signs of retail’s caution. “Retail investors are selling in relatively larger orders,” analysts wrote last week, “consistent with a shift toward more risk-averse positioning.” JPMorgan’s Retail Conviction Indicator, which uses the ratio of retail buys and sells to gauge investor sentiment, currently sits near its lowest level all year.
The AI Selloff May Be Nearing Its End
More broadly, the stock market has been stuck in a rut for the better part of three months as investors rotate away from growth stocks and the selloff in AI-linked names continues. But one strategist thinks the tide could be turning. In a research note last week, Morgan Stanley chief equity strategist Michael Wilson suggested the pullback might be nearing its end, and that investors should prepare to add risk to their portfolios rather than shy away from it.
Wilson says two factors tend to accompany the start of a new phase of a market cycle. The first is poor market breadth, in which a few large stocks drive the majority of gains. The second is the outperformance of so-called “quality” stocks. The momentum that propelled lower-quality stocks starts to fade, and earnings become more important.
And even as those earnings hold up, valuations start to fall. The US stock market is currently 6.6% undervalued, according to a composite of Morningstar’s fair value estimates. It was trading at a 3% premium a year ago.
Quality stocks tend to have durable earnings, minimal debt, and competitive advantages compared to their peers. In other words, they’re driven by strong fundamentals rather than momentum and speculation. Wilson says the recent outperformance of quality stocks suggests that “investors are being more selective about the companies that can sustain earnings, margins and cash flow through higher financing costs”—the result of rising interest rates. He adds that these stocks can continue to lead the market even as declines in semiconductor and AI stocks weigh on the major indexes.
Several high-quality companies with Morningstar’s wide economic moat designation for lasting competitive advantage have outperformed the US stock market this year, including tech giant Apple AAPL, healthcare firm Eli Lilly LLY, and financial firm Visa V.
Wilson says declines in an index of quality stocks typically accompany the end of a correction, and he advises investors to treat those declines as buying opportunities rather than “something more ominous,” like a bear market or a new economic downturn. “Bottom line, we are getting closer to the end of the mid cycle and leadership transitions as the S&P 500 catches down,” he writes. “We advise investors to be ready for either a very rapid reconciliation or a slower bleed into November because in our view, that will be the time to add risk rather than shun it.”
Oil Prices Hit Five-Month High
Last week, oil prices surged to a five-month high, pressuring equities as Middle East tensions ratcheted up. Brent crude futures, the global oil benchmark, rose more than 2% on Friday to trade above $117 a barrel, their highest price since late April. The Dow Jones Industrial Average slumped as much as 1.5% on Friday.
According to David Stubbs, chief investment officer at AlphaCore Wealth Advisory, oil is currently the greatest risk to the stock market. “It’s exacerbating several trends that are not good,” he says. Brent futures have risen more than 60% since July, pushing diesel prices to record highs and accelerating already-high inflation. The Federal Reserve responded to inflation pressures last month by raising interest rates for the first time since 2023, helping to push long-duration Treasury yields to multidecade highs.
“Everyone intuitively understands that the things that can cushion this [supply shock] have been worn down, and yet there’s still no resolution to the issue. Not even close; it’s actually going the other way,” says Stubbs, noting that long-simmering tensions rose.
Even after last week’s oil price run-up, investors could still push prices higher, according to Adam Turnquist, chief cross-asset strategist for LPL Financial. “Positioning and options skew both show that investors aren’t overly crowded into the trade yet, which leaves potential room for further upside,” he wrote on Friday.
