Analysis:October dive for AI-related shares tests broader US stock market's resilience

A recent decline in US AI and technology stocks is putting pressure on investors' appetite to allocate their funds into other equity areas, a shift that has helped bolster broader indexes in recent weeks. The disappointment from Alphabet, Amazon, and Intel has further exacerbated the situation for AI-related shares. Investors are now questioning the sustainability of the hefty financing required to sustain massive investment spending in AI.

While the broader market showed resilience in October, it may struggle to withstand a more severe drop in the AI sector. The tech sector constitutes 38% of the S&P 500, and investors are wary of signs that the selling will spread. A major red flag would be significant cuts to AI spending plans by hyperscalers, whose investments in data centers and infrastructure have been crucial for economic growth.

Despite the broad-based market performance in October, a prolonged decline in the AI trade could be mathematically challenging, but more importantly, psychologically difficult for investors.