'AI or bust:' Tech trade powered stocks through volatile September

Wall Street fared better than expected in September, given the month's historical reputation as the worst month for stocks. It largely comes down to, you guessed it, the artificial intelligence trade.

The S&P 500 (^GSPC) declined by 0.4% for the month as Treasury yields surged. It's down 1.9% from its record high set in August. September has historically been the weakest month for the S&P 500, with an average decline of 0.6% since 1950.

The Nasdaq Composite (^IXIC) gained 1.8% after hitting a new peak on Sept. 22. Tech giants Meta (META) and AMD (AMD), along with a handful of other semiconductor stocks, drove that performance.

Meanwhile, the Dow Jones Industrial Average (^DJI) fell by about 4.3%, while the small-cap-focused Russell 2000 (^RUT) dropped by 5.4%.

"It's AI or bust," Interactive Brokers chief strategist Steve Sosnick said, pointing to the divergence in stock performance for the major market indexes.

He added that, although the Nasdaq and S&P 500 outperformed on a relative basis, "if you look under the surface, … there's a lot not to like."

Market conditions tightened in September as Treasury yields surged to multi-decade highs. The 2-year and 10-year (^TNX) yields each rose by roughly half a percentage point, and the 30-year (^TYX) yield climbed nearly 40 basis points since the end of August.

The last time all three government bonds moved that much was September 2022, during the Fed's last hiking cycle.

Read more: How soaring Treasury yields could hit your finances

The pressure on equities has also shown up in the IPO market. Smart-ring maker Oura postponed its planned offering this week, joining companies like Holtec Nuclear and Bamboo Insurance in citing uncertain market conditions as reasons to pull back on their debuts.

Frontier AI company Anthropic (ANTH.PVT) has also reportedly pushed back its planned public debut from October to November. The listing was already expected to be the marquee IPO of the fourth quarter. It now represents an even clearer test of how far investor enthusiasm for AI can stretch.

Yet investors have largely powered through those pressures under the premise that the AI boom cannot be stopped.

UBS chief economist Arend Kapteyn said Wednesday that AI-related investment, along with the wealth effect created by rising AI stocks, now accounts for 80% or more of US economic growth.

"It just looks like AI is neutralizing everything, at least on an aggregate level," Kapteyn said. UBS recently lifted its estimate for AI-driven capital spending next year by $200 billion to $1.4 trillion. Non-AI component investment, by contrast, is "running at zero," Kapteyn added.

Read more: How to protect your portfolio from an AI bubble

The economic concentration is just the latest reminder of the mounting risks if the AI trade topples. Kapteyn said the wealth created by rising AI stocks has helped support consumer spending, particularly among higher-income households.

A sudden reversal could therefore hit the economy twice — through slowing business investment and weakening consumption.

So far, however, UBS sees signs that the boom is beginning to spread beyond the technology sector. Kapteyn said every dollar of AI-related capital spending this quarter appears to generate roughly $1.50 of investment in the following quarter, with only about a third of that follow-on spending going toward technology.

David Hollerith covers a range of developments throughout the financial sector, from Wall Street to banking and asset management to crypto and fintech. Email him at david.hollerith@yahoofinance.com. Follow him on X at @DsHollers.

Click here for in-depth analysis of the latest stock market news and events moving stock prices

Read the latest financial and business news from Yahoo Finance