Anatomy of a sell-off

Last week's sell-off was sharp, but importantly, it was not broad-based. Technology and energy bore the brunt of the correction, reflecting growing doubts about the pace of AI infrastructure investment and hopes of an end to the conflict in Iran. Five of the eleven S&P 500 sectors nevertheless managed to advance.
The political message from the US midterms is becoming increasingly relevant for markets. Resistance to data centres is growing, while pressure to bring the Iran war to an end is mounting. Both developments could moderate two important sources of inflationary pressure: energy prices and the enormous capital expenditure associated with AI infrastructure.
We should not confuse a repricing of expectations with the end of the AI investment cycle. The technology remains transformative, but investors are becoming more demanding about valuations, investment returns and the ability of companies to translate AI spending into actual earnings. Software businesses, in particular, are showing more resilience than many had anticipated, although competitive disruption and refinancing risks remain.
For us, the correction is a reminder that even powerful investment themes have a price. The longer-term outlook for equities remains constructive, but selectivity matters more than ever. We would rather own businesses with sustainable earnings, strong balance sheets and sensible valuations than simply chase the latest market narrative.