Weak AI trade and better-than-expected inflation data spooked stock markets last week. However, strong banking earnings and rotation into non-tech sectors gave us reason for optimism. The Nasdaq’s 4.5% weekly decline ended a four-week winning streak and marked the worst weekly decline for tech stocks since June. Last week, the S&P 500 fell 2%. The Dow Jones Industrial Average bucked that trend, rising 0.7% as investors moved to health care, consumer staples and other sectors less dependent on the artificial intelligence boom. The sell-off accelerated Wednesday as better-than-expected consumer inflation data raised concerns that the Federal Reserve could continue to raise interest rates for an extended period of time. The consumer price index in September rose 3.7% year-on-year, higher than the expected 3.6%, and the core inflation rate was also slightly higher than expected. The producer price index offered little reassurance on Thursday, rising 1.3% for the month and 6.3% for the year, the biggest annual and monthly increases since March 2022 and December 2022, respectively. Accelerating inflation, driven in part by soaring oil prices, could raise borrowing costs and complicate building large-scale AI infrastructure. Broadcom CEO Hock Tan warned on Monday that access to capital could become the industry’s next big constraint. While our cybersecurity stocks took a beating last week, there were rare tech bright spots this week in Metaplatform and Microsoft. Against this backdrop, the company continues to diversify beyond AI transactions, adding Kimberly-Clark on Tuesday as the acquisition of Kenview nears completion. We exited our remaining Honeywell Technologies positions on Wednesday to replenish cash. On Thursday, we cut Cardinal Health stock to capitalize on its recent rally and added to Bank of New York stock following strong earnings. Here’s a closer look at three trends that shaped the market this week. AI’s sharp selloff provides grounds for diversification AI trading took another hit last week as investors grew concerned about rising borrowing costs and increased competition in the semiconductor industry. Memory stocks including Micron, SanDisk, Western Digital and Seagate fell after Chinese rival CXMT announced advances in more efficient chip structures, raising concerns about increased competition and a potential oversupply. The iShares Semiconductor ETF extended its losing streak to nine sessions, its longest in more than a decade, while the VanEck Semiconductor ETF fell 10% this week, its worst week since July. Neoclouds like CoreWeave plummeted 25% last week as their total debt rose to more than $51 billion on concerns that technology companies were borrowing too much to build AI. Perhaps even more worrying than the drop in stocks is the jump in Coreweave’s corporate bond yields and the proliferation of credit default swaps, a type of debt insurance. Our cyber stocks Palo Alto Networks and CrowdStrike were the worst performers this week, dropping more than 18% and 17%, respectively. Reports that OpenAI is in early talks to acquire Trail of Bits have dealt a blow to the cyber sector. This type of acquisition would expand OpenAI’s cybersecurity ambitions. Cyber stocks were also caught in the crossfire of the AI trade. Kimberly-Clark and Eli Lilly emerged as some of the best-performing stocks in our portfolio last week as investors move away from AI and into defensive stocks. The stock market decline emphasized the importance of diversification. “We don’t talk about diversification enough, and part of the reason is that it’s no fun when one group continues to outperform the rest of the market,” Jim told Mad Money on Thursday. “But when that group collapsed in recent weeks, only diversification could save portfolios.” It’s unclear how long this rotation will last, but focusing too much on one investment theme can leave investors vulnerable to huge losses and panic selling. Diversified investing alleviates these fluctuations and makes it easier to continue investing. Meta and Microsoft prove why patience pays off Not all tech stocks crashed last week. Club Holdings’ Meta Platforms and Microsoft showed why patience with quality companies pays off. The company, the parent company of Facebook and Instagram, faced a backlash on Monday after releasing its latest AI model, Muse Wonder, and the more advanced Muse Wonder Full. Wells Fargo says it ranks second best in the industry behind Anthropic’s Claude Opus 5.5. The launch has the potential to attract more paying users and create revenue opportunities beyond advertising, providing further evidence that Meta’s large AI investments are starting to pay off. Microsoft made a remarkable comeback on Tuesday, closing at a record high for the first time in nearly a year, after its stock price fell by more than a third on concerns about AI spending and CoPilot’s competitiveness. We stuck with the stock because we trusted CEO Satya Nadella and CFO Amy Hood to turn things around. This is a claim Jim emphasized during Thursday’s October meeting. Microsoft’s efforts to expand Azure capacity, control spending growth, and revamp Copilot have helped restore investor confidence. Both recoveries reinforce Jim’s long-standing investment rules. The idea is to own the best companies, do your homework, and avoid panicking when blue-chip stocks fall out of favor. Meta and Microsoft each ended the week down more than 1%, which far outperformed most of our tech stocks. Leading technology product Salesforce rose 5% this week. It’s another stock Jim believed in when the stock looked like it was going to collapse earlier this year. Salesforce is still down 9% year-to-date, but is up 65% from its 52-week low of $146 in June. Bank earnings look good, but Wall Street isn’t buying Bank earnings in the third quarter gave reason for optimism, even though mostly solid results didn’t translate into higher stock prices. Jim said on Wednesday that investors appear to be more concerned about the future of the economy than what banks have just announced, given persistent inflation, rising interest rates and pressure on capital markets. Goldman Sachs on Tuesday delivered an outstanding quarter, with equity trading revenue surging 72%, investment banking fees rising 21% and wealth and wealth management beating expectations. Despite the strong performance, the stock price gave up its early rise. We view this weakness as a buying opportunity and upgraded Goldman’s rating to 1, the equivalent of a “buy,” while maintaining our $1,200 price target. Wells Fargo reported mixed results Tuesday, beating revenue expectations but missing sales. Encouragingly, net interest margin stabilized at 2.43% after declining for four consecutive quarters. We upgraded the stock to a Buy rating of 1 and maintained our $95 price target. Bank of New York also impressed on Thursday, beating sales and profit expectations and raising its full-year outlook. Strong fee income strengthens our confidence in our custody-centric business model, which generates recurring income and is less reliant on traditional financing. And, as mentioned above, the position grew even larger on the closing date. (Jim Cramer’s charitable trusts are Long KMB, BNY, CAH, MU, LLY, META, MSFT, GS, WFC. See here for a complete list of stocks.) 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