Something about this sell-off doesn’t add up…

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The AI Disconnect

Headlines are full of concerns: AI spending is unsustainable. Valuations are too high. The boom got ahead of itself.

But I’ve spent much of my career studying what investors do with their money, and something about this sell-off doesn’t add up.

Stock prices are falling while earnings expectations are rising.

And I think the explanation has little to do with AI.

I just completed an analysis of semiconductor companies worth at least $1 billion. Over the last month, 66% saw analysts raise quarterly earnings estimates while only 16% saw cuts.

Yet 82% of those same stocks were trading in bear-market territory, down at least 20% from highs.

Think about that: Two-thirds have improving earnings expectations, but more than 80% suffered bear-market wipeouts.

Digging deeper, I researched tech companies worth at least $2 billion growing revenue by 25% or more annually. Seventy-one qualified.

Here’s what I found:

  • Analysts see earnings growth of 28% next year, versus approximately 11% for the broader market.
  • Three out of four have rising revenue estimates.
  • Four out of five beat revenue expectations last quarter.
  • They trade at approximately 25 times forward earnings.
  • Yet two-thirds are in bear markets.

Twenty-five times earnings may not mean cheap. But when companies are expected to grow earnings more than twice as fast as the rest of the market, valuations deserve a closer look.

So why are these stocks falling so hard?

There’s something happening beneath the sell-off that I believe explains more than AI bubble headlines.

Wall Street is deleveraging.

Hedge funds borrow money to juice returns. But when positions fall, losses multiply, risk managers demand smaller positions, and funds are forced to sell, regardless of fundamentals.

And the latest data is revealing…

According to Morgan Stanley, hedge funds had their longest sustained period of risk reduction in more than 15 years. Gross exposure has fallen 8% from its June peak.

Goldman Sachs reports that hedge funds sold approximately $20 billion in technology stocks over two weeks in October. Sales of existing long positions outnumbered new short sales 4-to-1.

That’s not a tech bear bet… that’s risk reduction.

And when funds deleverage, they sell their biggest winners, not necessarily the weakest businesses.

Now consider my earnings research.

If AI infrastructure were collapsing, I’d expect analysts to be cutting earnings forecasts. Instead, they’re raising them.

I think stocks are falling because investors must shrink exposure, not because the businesses are failing.

Deleveraging can persist longer than expected, and falling prices can trigger more selling. But there’s a fundamental difference between a business losing customers and levered hedge funds reducing borrowing.

One threatens future earnings. The other changes who owns the stocks, and at what price.

Timing is uncertain, and volatility could continue. But consider what’s happening:

AI companies are expanding. Their suppliers’ earnings expectations are improving. Meanwhile, leveraged investors are shrinking their portfolios at a historically unusual pace.

Wall Street is reducing its exposure to AI at the very moment the companies building AI are increasing theirs.

Both are making enormous financial decisions.

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A Hiccup, Not a Turning Point

October was a reminder that markets don’t move in a straight line.

The companies building AI infrastructure just delivered some of the best quarters in their history. Wall Street sold them anyway.

The tech-heavy Nasdaq hit a record close on October 6, then fell 7.8% over the rest of the month. It finished October down 5.3%, its worst month since March 2025. And Friday was the worst day for stocks since June.

But this was a hiccup, not a turning point.

We’ve told readers of The Near Future Report that two things would be the most important during this earnings season: The biggest tech companies’ spending plans and suppliers order books.

Start with spending.

The hyperscalers are building at a record pace. Alphabet and Microsoft spent a combined $90.7 billion on capital expenditures in a single quarter. Amazon plans to spend about $220 billion this year.

That spending is paying off. The hyperscalers’ cloud businesses, which rent out AI computing power, are growing faster:

  • Google Cloud revenue grew 103% to $30.7 billion, the fastest growth Alphabet has ever reported for the unit.
  • Microsoft’s Azure grew 48%, up from 40% two quarters earlier.
  • Amazon Web Services grew 39%, its fastest pace in nearly five years.

This is amazing growth and will likely lead to more spending, which will lead to stronger earnings for many AI-related companies in a few years.

So, why did stocks fall?

Right now, Wall Street is focused on free cash flow. Companies whose free cash flow is shrinking or turning negative are being sold, even when that cash is going into new capacity that will drive future growth. Alphabet’s (GOOGL) stock had its worst day on record after it reported negative free cash flow of $9.1 billion.

Interest rates are another question mark. The Federal Reserve raised rates in September. On October 28, it held steady at 3.75% to 4% in a split 10-2 vote, and markets are now pricing in a possible hike in December.

When the path of rates is unclear, investors pay less today for growth that arrives years from now. Technology stocks tend to feel that first.

There was also likely deleveraging heading into the election. Before a major, uncertain event like this, many investors pay down borrowed positions and take risk off the table.

But that money didn’t leave the market. It just went to safer sectors as fund managers took precautionary measures. The Dow Jones Industrial Average finished October higher. Energy and healthcare stocks closed at record highs. And the 10-year Treasury yield fell about 0.37 percentage points as investors moved into bonds.

All of this is causing investors to pull back. We’ve seen several tech companies pull their IPO plans as demand wasn’t what they anticipated. And even OpenAI was forced to raise less money than it wanted at a lower valuation than it expected this past week.

But none of that changes the demand for AI infrastructure. What would change our view? A real cut to next year’s hyperscaler spending plans or shrinking order books at AI infrastructure companies.

So far, we’re seeing the opposite.

Where the Bitcoin Dip Gets Bought

Bitcoin has taken a beating lately…

First, it was October’s ETF outflows. Then, macro credit stress hit the asset and brought prices lower.

And just when Bitcoin looked to be getting up off the canvas, the sucker punch – the largest hack in the history of crypto.

The result is that the world’s first cryptocurrency has been heading in only one direction in recent weeks – down.

Following the hack, Bitcoin collapsed back below the psychologically important $80,000 level.

Price is now pulling back into the cluster of moving average support we highlighted last week, beginning with the 50-week SMA around $75,500.

What’s interesting about this pullback is that the support at these levels is showing up in real time.

We can see this in the order books.

Across major crypto exchanges, resting bids within 5% of current prices have climbed near their highest levels of 2026.

These bids represent resting buy orders backed by real capital. They show significant interest from BTC buyers waiting for price to dip lower and into the moving average support levels we highlighted above.

There is now nearly $370 million worth of them stacked in this range, which shows us how eager the market is to buy any slides lower in the coming weeks.

If we consider the current landscape, they just might get their wish…

Between the overhang of the hack, the subpar macro conditions we’ve been covering, and the uncertainty looming over U.S. midterm results, there are plenty of reasons why Bitcoin could go lower.

But the fact that support is stacking up in the face of all this adds to our conviction that the longer-term trajectory is higher.

That’s because of the timing.

It confirms the thesis we laid out in last week’s Chain of Thought, The Midterm Playbook for Crypto.

Bitcoin has historically found its low roughly 18 months before a halving event. The next one is expected around April 2028.

If the pattern holds, these next few weeks represent the point of maximum opportunity before the next cycle begins.

There’s even an eerie rhyme with the last cycle. In 2022, it was the aftermath of FTX’s collapse that marked the bear-market low. This time, it may be the Binance hack hangover that hands patient investors their final entry point.

The next few weeks are sure to be filled with uncertainty, and likely some volatile price action. But when we zoom out to the big picture, every signal we track is pointing to the same conclusion…

Bitcoin is in the process of making its final stop before the next cycle begins.

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