Markets brace after Powell as rotation tests tech leadership

Introduction#

According to Monexa AI, U.S. equities faded into Tuesday’s close as investors rotated out of mega-cap technology and into energy, defensives, and select cyclicals following cautious remarks from Federal Reserve Chair Jerome Powell about equity valuations and the timing of rate cuts. The S&P 500 (^SPX) slipped while the Nasdaq Composite (^IXIC) underperformed, even as the CBOE Volatility Index (^VIX) eased into the close. Overnight, the macro tone stayed delicate: Reuters reported that global stocks softened and the dollar firmed after Powell refrained from endorsing aggressive rate-cut timelines, while European defense shares firmed on geopolitical headlines (Reuters. Separately, Australia’s August inflation accelerated to a one-year high, complicating the regional rates picture (Reuters.

The setup into Wednesday’s U.S. open is defined by three forces: first, a valuation reality check from the Fed that is nudging positioning away from the market’s most crowded growth trades; second, continued confirmation that AI infrastructure spend is real but unevenly distributed across suppliers; and third, a geopolitics-tilted tape where defense and energy continue to attract capital. Against that, breadth looks tentatively better beneath the surface, but concentration risk remains the swing factor for index-level outcomes.

Market Overview#

Yesterday’s Close Recap#

The major U.S. benchmarks finished mixed on Tuesday, with the Nasdaq leading the pullback. According to Monexa AI, closing levels were as follows.

Tuesday’s session was shaped by a conspicuous de-risking in technology. Monexa AI’s heatmap shows the largest sector by weight was dragged lower by declines in NVDA (-2.82%), MSFT (-1.01%), and software outliers like Synopsys (-4.75%) and ORCL (-4.36%). A few semis and legacy hardware names bucked the trend, with INTC gaining +2.02%. That weakness in mega-cap tech proved sufficient to tilt the headline indices lower despite resilience elsewhere.

Offsetting the tech downdraft, Energy led decisively with broad-based gains across services and upstream. Notables included Halliburton (+7.34%), Texas Pacific Land (+6.19%), XOM (+1.72%), COP (+1.59%), and BKR (+2.64%). Defensives also posted gains: staples advanced, and Utilities were notably positive on a breadth basis despite idiosyncratic movers. Real Estate finished modestly higher, while Financials were mixed with payment networks under pressure and exchanges/brokerages firmer.

Sector dispersion was extreme within Industrials and Healthcare. Generac plunged roughly -10.27%, while transports rallied with CSX (+2.62%) and LUV (+3.24%); BA rose +2.00%. In Healthcare, distributors outperformed—McKesson (+6.36%), Cardinal Health (+4.85%), and Cencora (+4.71%)—while biotech was heavy with Regeneron (-4.67%) and MRNA (-2.90%).

Overnight Developments#

The overnight narrative was led by policy signaling and geopolitics. Reuters said global shares slipped and the dollar rose after Powell avoided endorsing aggressive rate cuts and warned that equities are “highly valued,” a sentiment that weighed on growth-style leadership and risk appetite (Reuters. European equities were indicated lower into Wednesday’s open after those remarks, though European defense names gained following comments from U.S. President Donald Trump suggesting Ukraine could retake Russian-held territory, which supported the aerospace and defense complex (Reuters. Denmark’s central bank cut its growth outlook, citing U.S. tariff headwinds and a pharmaceuticals slowdown, underlining that global trade and sector-specific dynamics remain in flux (Reuters. In Asia-Pacific, Australia’s monthly CPI quickened to its highest level in over a year, complicating the Reserve Bank of Australia’s policy path and adding to the cautious tone in regional equities (Reuters.

Company-specific headlines continue to orbit AI infrastructure. Analysts highlighted NVDA’s deepening alignment with OpenAI as part of multi-gigawatt data center buildouts and a new collaboration with Alibaba on physical AI applications like robotics, helping to frame an AI spend that is large but increasingly selective across vendors (Bloomberg, Reuters. Elsewhere, the FTC and several states filed suit challenging ticketing practices at Live Nation/Ticketmaster, maintaining a regulatory overhang for LYV (Monexa AI; see also Reuters.

Macro Analysis#

Economic Indicators to Watch#

With Powell’s latest comments foregrounding valuation sensitivity and the pace of easing, investors head into Wednesday focused less on a single datapoint and more on the evolving mix of labor and inflation prints. As Nicholas Janvier noted in a CNBC interview, the Fed is clearly trying to manage expectations around rate cuts amid a cooling employment backdrop while capex on AI remains a durable theme (CNBC. According to Monexa AI, the overnight Australia CPI beat and Denmark’s growth downgrade reinforce a global picture where disinflation is uneven and trade frictions are an active drag in parts of Europe.

In practical terms, that means the market will continue to key off any updates to inflation momentum, job openings, and wage data in the days ahead, as those will influence not just the timing and magnitude of any Fed easing this cycle but also factor risk premia embedded in high-duration equities. The index-level response is likely to remain highly sensitive to the path of large-cap tech multiples and concentrated leadership.

Global/Geopolitical Factors#

Policy and geopolitics remain live drivers. European markets opened on the back foot after Powell’s valuation remarks, while defense names found support after President Trump’s comments on Ukraine’s prospects (Reuters. Saudi Arabia’s market regulator is reportedly preparing to lift foreign ownership caps above 49% to revive interest in local equities, a move that could influence EM flows and valuation differentials if implemented (Bloomberg. Meanwhile, Australia’s sticky inflation keeps Asia-Pac rates relatively less dovish in the near term (Reuters.

For U.S. investors, the combination of valuation-aware Fed rhetoric, incremental tariff drag in Europe, and a marginally hotter inflation print in Australia argues for a continued quality bias and selectivity in cyclicals. Defense and energy remain bid on policy visibility and commodity dynamics, respectively, while trade-sensitive European exposures will likely lag until there is clearer relief on tariff policy or a rebound in pharma’s growth engine.

Sector Analysis#

Sector Performance Table#

According to Monexa AI, Tuesday’s sector performance at the close was led by Energy and defensives, while Technology and Communication Services lagged. Here is the sector scoreboard from the prior session.

The rotation was textbook: investors funded Energy and defensive adds by trimming long-duration growth and ad/tech. Within Technology, outsized declines in software (Synopsys, ORCL and AI bellwethers (NVDA, MSFT exerted an index-level drag given their size. Select semis and hardware outperformed (INTC +2.02%), highlighting a micro-rotation within AI supply chains. Communication Services’ modest uptick beneath the surface masked negative prints from GOOGL, GOOG, META, and Netflix, with telecom (TMUS +0.87%) and smaller media names lifting the group.

Healthcare reflected a bifurcation that continues to matter for portfolio construction. Distributors and payers—McKesson, Cardinal Health, Cencora, and UNH (+1.87%)—outperformed, while drug developers and biotech were offered, led by Regeneron and MRNA. Industrials’ dispersion was equally stark: Generac (-10.27%) contrasted with strength in rails (CSX, airlines (LUV, and aerospace (BA. In Consumer Cyclical, the headline was AMZN (-3.04%) and TSLA (-1.93%) weakness set against gains in higher-end retail and housing proxies like Tapestry (+1.98%), Williams-Sonoma (+1.89%), and D.R. Horton (+1.24%).

Utilities and Real Estate deserve a closer look. Utilities showed breadth strength but were punctuated by idiosyncratic swings—Sempra (+4.47%), Vistra (-6.28%), Constellation Energy (-3.02%)—that argue for security selection over blanket exposure. REITs were broadly firmer with Welltower (+3.06%), PLD (+0.45%), Simon Property (+1.65%), EQIX (+0.65%), and Ventas (+2.11%). In Basic Materials, industrial gases diverged—Air Products (-3.79%), LIN (+0.46%)—while copper/precious-exposed names like Newmont (+1.13%) and CF (+1.75%) gained on commodity-specific flows.

Company-Specific Insights#

Earnings and Key Movers#

AutoZone’s quarterly results were the day’s marquee print. According to Monexa AI, AZO posted EPS of $48.71, below consensus, on revenue of approximately $6.24 billion, with gross margin pressured by a non-cash LIFO charge and higher operating expenses. The company still delivered same-store sales growth of 5.1% and continued store expansion, but the margin profile introduced near-term uncertainty following the release (Monexa AI; see also Reuters. The stock traded lower around the report and remains a name to watch for any follow-up commentary on inventory normalization and expense trajectory.

In AI infrastructure, Evercore ISI lifted its price target on NVDA to $225 and reaffirmed Outperform, citing visibility from a strategic partnership with OpenAI that covers at least 10 gigawatts of AI infrastructure, including GPUs, racks, networking, and software. Monexa AI notes the firm estimated the OpenAI partnership could contribute approximately $5.5 billion to NVIDIA’s revenue in the second half of calendar 2026. Additional headlines framed Alibaba’s collaboration with NVIDIA on physical AI tools for robotics, which extends the demand surface beyond cloud training into edge and autonomy.

Brokerage and fintech flows remain in focus. Citigroup raised its target on HOOD to $135 and shifted to Neutral, noting a supportive rate backdrop for net interest and engagement tailwinds (Monexa AI; see Reuters. While Powell’s tone pushes back against aggressive cut timelines, the current rates level continues to be a mixed bag across financials: positive for exchanges/brokers (CBOE, IBKR and larger banks’ net interest income, but a headwind for long-duration growth valuations.

Consumer Discretionary was eventful beyond AMZN and TSLA. TGT announced its largest Target Circle Week promotion (October 5–11) featuring discounts starting at 40%, set against a downgrade to Underperform from Wolfe Research on reinvestment needs. The juxtaposition underscores a category where traffic can be bought in the near term, but full-year margin math is increasingly complex amid promotional intensity.

Regulatory pressure stayed high for live entertainment. The FTC and state AGs filed suit against Ticketmaster and LYV over resale practices, sustaining a legal overhang despite fresh sell-side targets that assume business momentum can continue. The risk-reward hinges on deal structure outcomes and potential remedies; investors should expect ongoing headline risk.

On AI compute capacity outside the hyperscalers, IREN garnered attention by acquiring 12,400 additional GPUs for its AI cloud, targeting a $500 million ARR by Q1 fiscal 2026, alongside a new $82 price target from Roth Capital and year-to-date stock gains above +300%. That trajectory reinforces the broader theme of distributed AI capacity buildout, though funding, power availability, and utilization remain the gating variables.

Internationally, Kingfisher surged on earnings strength, while defense supply chains saw incremental orders tied to submarine programs for NOC partners, echoing the sector’s improving multi-year visibility (Monexa AI; Reuters.

Extended Analysis#

Global Overnight Shifts: How They May Drive Today’s Open#

The tape into Wednesday is a test of how far the quality/value rotation can run if Fed rhetoric caps multiple expansion in the most crowded trades. According to Monexa AI, overall market sentiment is “mixed with a cautious tilt,” with clear rotation away from concentrated tech leadership toward energy, value, and defensive pockets such as staples, utilities, and REITs. The practical implication is that single-stock selection matters more than beta right now: dispersion within sectors is high, and the winners are often driven by very specific catalysts.

The most important cross-asset tell remains the path of AI capital expenditure—and its concentration. The same data that supports NVDA as the preferred supplier for OpenAI’s installations also creates a paradox: high visibility for the leader, but rising scrutiny on valuations and concentration that increases systemic sensitivity for the broader indices. Monexa AI’s analysis highlights a strong positive correlation between NVIDIA’s stock and the Nasdaq Composite, reflecting the degree to which index performance hinges on a small handful of names. This makes Powell’s valuation caveat more than rhetorical; it is a portfolio construction issue. Position sizing, hedge overlays, and a look at equal-weighted exposures are appropriate tools for investors managing concentration risk.

On the physical side of AI, power is the new bottleneck. Monexa AI’s synthesis of industry research indicates U.S. data center power demand could more than double by 2035 and account for a mid-to-high single-digit share of total U.S. electricity consumption by 2030. That has concrete implications. Utilities with generation and transmission projects, grid equipment providers, and advanced cooling vendors are now direct beneficiaries of AI compute growth. It also helps explain why Utilities and certain Industrial capital-goods names can trade with AI beta even when core software/hyperscaler prints are choppy. At the same time, Utilities’ idiosyncratic swings—Sempra’s +4.47% move versus Vistra’s -6.28%—argue for underwriting specific balance sheets and regulatory regimes rather than treating the group as a monolith.

Energy’s leadership looks more durable when viewed through this lens. AI data centers are power-hungry, and until renewables and grid upgrades can fully bridge the gap, conventional generation and energy services will stay in demand. Tuesday’s broad strength across XOM, COP, BKR, and HAL fits with that structural bid. Investors should, however, remain mindful of commodity volatility and the policy push for cleaner sources, which can change the mix of beneficiaries even if overall demand rises.

Within Financials, the dispersion between payment networks and market-structure plays is a function of both rates and cyclicals. Payments (MA came under pressure, while exchanges (CBOE and brokers (IBKR benefited from higher trading interest and rate tailwinds. For stock pickers, that argues for distinguishing between transaction volume sensitivity, balance sheet rate exposure, and valuation. In an environment where Powell is telegraphing caution on valuations, lower-multiple cyclicals with improving fundamentals can outperform even if the top-line macro is merely okay.

Healthcare remains a microcosm of the market’s broader pivot. Distributors and payers with steady cash flows did the heavy lifting, while biotech and high-beta therapeutics sold off. The lesson is to avoid treating “Healthcare” as one trade. The distributors’ outperformance alongside UNH shows how supply chain leverage and predictable utilization can act as bond-like equity exposure in a rate-uncertain market, whereas pipeline risk and funding windows keep biotech volatile.

Finally, Consumer Discretionary’s two-track performance—big-cap e-commerce/EV weakness opposite strength in specialty retail and home-related names—should be read in the context of margin math. TGT’s upcoming promotion illustrates that traffic is available at the right price, but the willingness to sacrifice margin for share varies by management team and balance sheet flexibility. That is a reminder to underwrite operating leverage and inventory discipline as much as demand.

Domestic Sectors to Watch Before the Bell#

Technology is still the market’s fulcrum because of weight. According to Monexa AI, the tech sector’s roughly one-third weighting ensures that even modest down days in NVDA or MSFT propagate into the indices. The overnight flow of AI headlines remains supportive in the medium term, but the pricing of that support is the issue Powell has put in relief. Meanwhile, Energy, Real Estate, and select defensives have the wind at their backs heading into the open.

Defense is an additional swing sector today. With European defense names firmer on geopolitical commentary and fresh news of supply-chain orders linked to submarine programs (Monexa AI; Reuters, primes like LMT and NOC have a constructive setup. The denominator risk for the group remains budget politics, but near-term flow is supportive.

Conclusion#

Morning Recap and Outlook#

Heading into Wednesday’s U.S. open, the market is balancing a valuation-aware Fed, hard evidence of ongoing AI infrastructure spend, and geopolitical crosswinds that keep defense and energy bid. Tuesday’s close confirmed that rotations can overpower index-level momentum when leadership stumbles: Technology’s pullback dragged the indices even as Energy, Staples, Utilities, and REITs posted gains. The overnight picture, led by Powell’s caution and macro headlines from Europe and Asia, argues for another session where stock selection, not beta, is the edge.

Action items for investors are straightforward. First, size concentration risk deliberately: the correlation between NVDA and the Nasdaq means single-name volatility can translate into index-level drawdowns. Second, lean into subsector dispersion with a barbell: maintain exposure to Energy and selective defensives while underwriting cash-generative compounders in Tech and Communications whose valuations embed realistic growth. Third, treat Utilities and Real Estate as idiosyncratic, not generic factor bets; project pipelines, regulatory regimes, and balance sheets are the primary drivers of return dispersion.

In terms of catalysts, watch for any follow-up Fed communication that clarifies the reaction function to mixed inflation and employment data, as well as incremental color on AI infrastructure orders, power procurement, and data center timelines from hyperscalers and their partners. At the company level, monitor AZO for management’s commentary on inventory and operating expenses, TGT for promotional elasticity and margin signals ahead of its event, and LYV for legal developments.

The broader message is consistent: breadth can improve even if headline indices chop, provided the rotation away from the most expensive growth cohorts persists. For now, the market’s trajectory remains “higher despite bumps” as some strategists put it on CNBC, but leadership will likely be more distributed than it has been over the past year. That makes today another day to trade the tape we have—not the one we had.