Fears are growing once again around continued momentum for US-listed AI stocks, but investors are not out of the market yet, with flows into defensive European equities.

How long this increased optimism lasts depends on the severity of the sell-off in US-listed technology stocks.

A severe market correction might convince investors to start taking profits and to pack up for the year. If this is seen as a moment for rotation, investors will likely continue to cycle into undervalued defensive and European stocks.

On Thursday, 22 October, the Nasdaq 100 fell 2.9% in a day, with the broader index registering its worst day since June.

Strength elsewhere in US equities shows the selling remains selective. The evidence favors rotation over broad contagion, one late-stage capital investor said. “Capital is rotating away from AI exposures,” she added.

The sell-off was attributed to fears around Meta’s capital-raising plans and its creation of a new class of shares for equity raises.

Meta noted that while it had enough capital on its balance sheet, it would be prudent to look at capital raising before its AI competitors had absorbed more of the available capital in the market.

Investors are increasingly concerned that AI capex is turning into a black hole, with little sign of ROI in sight and a competitive market pressuring the bottom line of all major LLM providers.

“We are not sure where this will end up and there is a lot of froth in the market,” noted one global equities banker, also pointing to the cancellation of several data centre IPOs as an inflexion point in the market.

The banker noted that, in his opinion, the weakness in these potential deals may have said more about the quality of the companies coming to market than the broader investment trend around AI. But it is clear investors are now sharply focused on seeing a return from AI capex and that capital markets cannot simply be used as a cash printing machine forever.

Some of those companies could already be public had issuers and their banks set realistic valuation expectations from the outset, one investor said, describing some syndicates, issuers, and private equity backers as “tone deaf” about the state of the market.

In the bond markets, SpaceX is seeing weaker investor demand, leading to more expensive terms, while neocloud operator CoreWeave is down more than 53% over the last six months.⁠

Weaker investor demand has also plagued OpenAI in its latest funding round, leading to it cutting its reported valuation target.⁠

Into this maelstrom, Anthropic publicly filed its S-1 registration statement today, 26 October, taking a step towards a mammoth IPO, a deal that even in the best conditions could suck oxygen out of equity markets.

However, in an environment where investors are questioning AI capital expenditure, Anthropic’s IPO primary raise of up to USD 100bn might prove too much of an ask in a nervous market.

Even if the deal does go ahead as planned, its valuation may have to come in below its reported USD 1.5tn aim, which is already a USD 500bn cut from a previously reported target of USD 2tn.

The question is how far Anthropic’s scarcity value can insulate it from the pressures that have forced other IPOs off the calendar. Its status as a must-own for some investors could give it more room to proceed in a difficult market, but that does not mean they will pay any price.

Defensive Europe remains key hedge

In this environment, European equities are being used as a safe haven for investors seeking safety away from increasingly turbulent US-listed tech.

According to European equity analysts at BofA, the latest bout of weakness in AI exposure has driven one of the sharpest European sector rotations in recent history. While this has also hit European stocks exposed to AI, it has hugely benefitted defensive sectors.

The analysts noted that “key AI capex beneficiaries – semis, mining and cap goods – have been the worst performers and the “anti-AI” sectors – food & beverages and personal & household goods – have been among the strongest.”

Given Europe’s smaller exposure to AI, this has led to broader capital flows across sectors.

“The way people look at Europe it is a low beta and less AI market,” a second banker said. “When the AI story gets a setback people tend to rebalance into Europe as a hedge.”

The banker noted that trading teams are seeing a significant rotation into Europe among global investors, as has been the case throughout the year when AI fears have prompted broad selling of US tech. This is also being seen in more defensive US names not linked to AI.

Europe being seen as a safe haven is somewhat remarkable given soaring sovereign debt and mounting political risks across the continent.

France has been without a stable government since mid-2024 and is facing a presidential election.

The UK is on its seventh prime minister since the Brexit referendum in 2016, and German Chancellor Friedrich Merz is battling historic unpopularity and a resurgent far-right winning local poll after local poll in late 2026.

But despite this, European companies continue to tap equity capital markets for vast sums of capital, often to fund transformational M&A plans.

Last week, French-listed Schneider Electric tapped the market in a EUR 6bn equity raise to part-finance the EUR 21bn acquisition of US-listed PTC, which was announced earlier this month. PTC provides software for complex industrial product design, engineering, and data management.⁠

The acquisition drew some scrutiny, given PTC is itself somewhat of an AI play but also has the potential to be disintermediated.

However, few investors were concerned at all by the riots across France and the rapidly widening sovereign spreads, sources close to the deal have told ECM Pulse.

“It is increasingly surprising to us that the country risk is far less of a big deal than it would have been before in some of these landmark transactions,” noted the second banker, who also worked on the Schneider Electric deal.

Alongside Schneider’s capital raise were several other significant sell-downs, including a sale of shares in Polish retailer Pepco by long-term shareholder Ibex.⁠

Even though Europe’s IPO market looks bereft of deals, a rotation could still lead to significantly more European issuance through the end of the year, as long as this market weakness does not worsen to the point that investors shut up shop.