For months, technology stocks had supported the rally. Then came Wednesday’s inflation surprise. Prices were rising faster than expected, and investors began to reassess how much they were willing to pay for the companies that had led the market higher. By the end of the week, technology shares were under heavy selling pressure.

The Nasdaq Composite, home to many of America’s biggest technology companies, fell 4.48% over the week. Meanwhile, the Dow Jones Industrial Average, with greater exposure to traditional businesses, rose 0.67%. This seems to be more than just a bad week for tech giants’ stocks.

Investment specialists call this dynamic a rotation: money moving from one segment of the stock market to another, rather than leaving equities altogether. Some investors also turned to US government bonds as markets grew more nervous. The main questions now are where the money went, why it moved, and whether this shift will last.

Equities: tech takes the hit. The selling was not confined to the biggest technology names. The S&P 500 fell 1.95% over the week, while the Russell 2000, which tracks smaller US companies, dropped 3.17%. Semiconductor stocks were among the hardest hit, losing about 10%. These are the companies making the chips behind computers and artificial intelligence, known as AI. The pressure extended to businesses riding the AI boom. CoreWeave, which rents out computing power, and Nebius, another provider of AI infrastructure, came under particular strain. These companies stand to benefit from rising demand for computing capacity, but they also face questions about the cost of building it and, in some cases, the debt needed to finance expansion.

What it means. Three forces were weighing on technology shares. First, hotter inflation raised concerns that the Federal Reserve, the US central bank known as the Fed, might keep interest rates higher for longer, or tighten policy further. Higher rates make profits expected years from now worth less today, which makes expensive growth stocks less attractive. Second, investors were questioning how much the AI boom would ultimately cost. Building the infrastructure to support artificial intelligence requires enormous investment, and expansion funded by debt leaves companies more exposed when borrowing becomes expensive. Finally, after months of strong gains, some investors may simply have decided to lock in profits.

Wednesday marked a turning point. Technology stocks fell about 3%, while health care rose 2.44% and consumer staples, which include food, beverages and household goods, gained 2.21%. This means that investors were moving toward businesses whose products people continue to buy even when the economy slows, such as medicine, groceries and everyday household essentials.

Rates and credit: inflation changes the calculation. US consumer prices rose 3.7% in the year to September, above the 3.6% economists had expected. A 9.1% monthly jump in petrol prices added to the pressure. The yield on the 10-year US Treasury, which is the rate the US government pays to borrow for ten years, rose to around 5.3% on Wednesday before falling to about 5.1% by Friday.

What it means. Hotter inflation would normally push government bond yields higher, because investors demand more compensation for the risk that inflation will erode their returns, while markets also reassess the likely path of interest rates. But as fears about growth and market volatility increased, some investors sought the relative safety of US government bonds. When demand for existing bonds rises, their prices increase and their yields fall.

The week ahead: does the rotation have further to run? Netflix reports its results on Tuesday, offering an early test of investor appetite for technology and growth stocks after the sell-off. Investors will also be listening closely to Fed officials ahead of the central bank’s meeting at the end of the month.

What it means. For now, the message from Wall Street is that investors have become more selective about which stocks they want to own.

See you next Monday for the next chapter of this story.