Fears of an impending AI implosion are gripping many tech stocks. 

Suddenly, AI companies found themselves besieged by plunging equity prices and rocketing borrowing costs. CoreWeave (CRWV), Nebius (NBIS) and a host of AI infrastructure companies were hammered by indiscriminate selling as investors fled the once-rosy scene.  

Three related issues sparked this recent sector meltdown. 

The first was the rocketing government yields earlier this month. This raised the overall debt cost for the entire AI infrastructure buildout because bond investors demanded more compensation. AI projects are inherently risky. So yields should match this risk. For example, CoreWeave’s five-year bond yield surged to 15% last week, up from 9% in the summer. 

The second factor was lower-than-expected revenue from OpenAI. This injected fears that demand for AI is not as strong as expected. The third factor is the rise in input costs for AI datacenters. 

Like diesel prices, electricity costs in US are at multi-year highs (see Chart 1). This raises household expenditure for everyone. No one can escape. No wonder resistance to new AI datacenters is hardening. 

But how long will the AI meltdown last? Until the last seller gives up. For now, I doubt that has happened yet. 

Nasdaq QQQ is ‘only’ 5.5% beneath its record highs; whilst S&P SPY’s drawdown from its all-time high is just 1.8%. Correction, what correction?

Bifurcation in commodity markets: Speciality metals down; oil up

But underneath these two massive indices, rot is setting in a number of industries, including some commodity subsectors.  

I have mentioned about the risk of a commodity correction a few weeks back. This corrective trend has deepened. 

Strategic metals stocks (ETF: REMX), for example, are suffering from immense selling. The ETF broke new year lows and many individual rare earth stocks are down by 50% or more since the summer. 

And despite the acceleration EV adoption - most recently caused by skyrocketing diesel prices - lithium stocks appear very toppy and poised for a further meltdown (Chart 2). 

But a bifurcation in the commodity market is taking place. Speciality metal stocks down; energy equities up. 

In recent days, many large oilers have broken out to the upside and outperformed the general market. Stocks like Conoco (COP), Chevron (CVX), Marathon (MPC), and Exxon (XOM). 

Ergo, the SPDR Energy ETF (ticker: XLE) hit record highs last week (Chart 3). For now, investors are no longer expecting the Iran conflict to go away anytime soon. Petroleum stocks are depleting by the week and this will cause users to start bidding more aggressively for remaining products on the market.

Brent Oil trades above $110 a barrel, indicating strong buying interest.

Energy aside, some consumer staples are enjoying a revival in fortunes due to the deflating AI bubble. 

Have you seen Coca-cola (KO) recently? Its current performance easily rivals those formerly red-hot AI stocks. Its share price is accelerating into new all-time highs (Chart 4). 

Even Walmart (WMT) has regained its composure after a year-long sideways trend.

Perhaps this is a sector rotation. After all, investors are still flushed from those mammoth AI gains and this pool of liquidity has to go somewhere. 

In sum, investors are not convinced that the equity bull trend is over. But they are switching over to more conservative blue-chips stocks and are not leaving the table yet.