From "surefire profits" to "choosing the lesser of two evils," the AI investment logic has completely changed!

Title context: From "surefire profits" to "choosing the lesser of two evils," the AI investment logic has completely changed! Text: The AI investment narrative is now facing an internal contradiction in its own logic. The market's judgment on the capex path of hyperscalers has evolved from the previous "win no matter what on the upside" to the current "choose the lesser of two evils" dilemmaacceleration pressures free cash flow, while deceleration casts doubt on the demand outlook, and both paths point to a selloff in AI-related assets. According to Wind Trading Desk news on October 23, Nomura cross-asset strategist Charlie McElligott noted in a report that over the past week, negative sentiment catalysts within the AI ecosystem emerged one after another, and combined with the long positions accumulated during the September "agent hype" rally, the market experienced large-scale forced liquidation. In the single most violent selloff day alone, 47 of the 124 US equity long-short pairs monitored by Nomura saw single-day moves exceeding 3 standard deviations, and 6 hit extreme deviations of more than 5 standard deviations. This shock not only hit core AI concept stocks but also spread through cascading liquidations of crowded positions into Treasuries, FX, and commodities markets, triggering cross-asset systemic deleveraging. Next week, the market will enter a dense window of hyperscaler earnings disclosures, including Alphabet Inc. Class C (GOOGL.US), Amazon.com, Inc. (AMZN.US), and Microsoft Corporation (MSFT.US), alongside the Federal Reserve's policy meeting, and market direction will face a key near-term test. The Capex "Prisoner's Dilemma" The core narrative of the AI trade has sharply shifted from the previous one-sided logic of "all positive outcomes are broadly bullish" to a two-way dilemma where "everything looks bearish." McElligott described this situation in the report as "either choice is poison": First, if hyperscaler capex continues to accelerate. As the latest Meta (META.US) earnings revealed, the market will focus heavily on the continued depletion of free cash flow and further question overall financing sustainability. This path carries nonlinear risk, meaning debt must be issued at larger scale and wider spreads, and the AI trade comes under pressure from the "unsustainable" narrative. Second, if hyperscaler capex shows a substantial deceleration, it would mean that the "optimal scenario" already priced by the marketcovering core theses such as AI demand, technology adoption, profitability, and end-user productivity gainsis breaking down, and the AI trade would face an even more violent shock. The formation of this dilemma is closely tied to the rapid rebuilding of long positions during the September "agent concept" rally. At that time, large amounts of capital poured into core AI names, accompanied by sizable speculative call option positioning, laying the groundwork for the subsequent stampede-like exit. Stop-Loss Triggers Spark Cross-Market Deleveraging Crowded positioning is the core reason this round of volatility was unusually severe. According to Nomura trading desk data, in the single most violent selloff day, a total of 124 US equity long-short pairs triggered stop-losses, of which 47 pairs moved more than plus or minus 3 standard deviations, 26 pairs exceeded plus or minus 4 standard deviations, and 6 pairs exceeded plus or minus 5 standard deviations. (Performance of various pair trades over the past period) McElligott believes the root cause of this stop-loss wave is that "high Sharpe ratio trades" were highly concentrated throughout 2026, with carry strategies and trend-following strategies resonating over the long term, creating a rare broad-based winner effect. The current point coincides with the end of the fourth quarter, when fund managers face year-end performance pressure. In an already stressed drawdown environment, the incentive to actively seek a rebound is far weaker than the defensive instinct to "preserve capital and cross the year safely"a "de-risk, close positions" mode has dominated market behavior. At the same time, the reset of the AI narrative is accelerating position adjustments in systematic trend strategies, especially concentrated in the previously extremely crowded US Treasury and short-term rate shorts. According to Nomura QIS data, over the past two weeks, CTA trend strategies have closed about $68 billion in Treasury futures shorts and $38 billion in short-term rate futures shorts, but the signal remains in a net short state, meaning that if the bond rally continues, the potential forced covering scale remains considerable. (Over the past two weeks, CTAs have completed more than $100 billion in short covering. To trigger the next wave of about $50 billion in strong buying within the green box, bond prices need to wait for a further upward break above the +2% trigger threshold.) McElligott believes that as short-term window covering is largely complete, the squeeze momentum in bond shorts is pausing for now. Both the 2-week and 1-month cycle models have flipped to "long" signals, but for the 3-month cycle model to flip long from current levels, bond prices still need a substantial further rise. Macro Resonance: The Correlation Switch Between Bonds and Stocks This reset of the AI narrative has simultaneously triggered structural changes in correlations within both the bond and equity markets, a signal worth watching at the market-mechanism level. On bonds, the protective property of "negative stock-bond correlation" has reappeared. McElligott noted that a large amount of capital completed an asset allocation switch on the previous trading day through equity futures selling and Treasury futures buying, with bonds once again playing the role of a risk hedge. This feature, which had failed for a time after persisting through most of the year, has now returned as the credibility of the "growth scare" scenario rises. The equity market has seen the opposite switch. For most of 2026, the Nasdaq and semiconductor sectors showed a rare feature of "higher volatility on up days than on down days"; now, this relationship has reversed back to a "negative spot-volatility correlation," meaning volatility is greater when stock prices fall. This switch is most prominent in the Nasdaq and SMH (semiconductor ETF) space, directly reflecting the market's repricing of the sustainability of AI capex. (The Nasdaq and Semiconductor ETF indices saw volume on "down days" nearly 2:1 versus "up days," a phenomenon that reappeared in October.) It is worth noting that VIX volatility at the overall S&P 500 index level has been relatively mild. McElligott attributes this to a "reverse dispersion" effecttech longs were hit hard, while rate-sensitive sectors and other short targets rebounded sharply, and the two offset each other so that overall index-level correlation did not rise explosively. Large Options Signals: Contrarian Funds Are Still Positioning for an AI Rebound Despite the overall pressured sentiment, several noteworthy contrarian positioning signals have appeared in the options market, mainly in call options on some core AI names. According to McElligott's observations, the following notable call buying activity occurred over the past week: CoreWeave (CRWV.US) paid a total premium of about $69 million, involving notional option exposure of about $170 million; Nebius Group (NBIS.US) paid a total premium of about $25.7 million, involving notional exposure of about $80 million; Micron (MU.US) paid a total premium of about $20 million, involving notional exposure of about $85 million. The above trades involve out-of-the-money call options expiring from March to April 2025, showing that some funds are still maintaining directional bets on a medium-term rebound in the AI sector amid the current turmoil. As for potential stabilization conditions, McElligott believes the key is whether sellers of the volatility risk premium (VRP) are willing to follow the historical pattern of "selling into rising volatility," especially whether the stabilizing role of 0DTE gamma selling strategies in buying dips and selling rallies will be an important indicator for judging whether volatility can converge again. (0DTE gamma range) This article is reprinted from "Wall Street Insights," author: Bao Yilong, GMTEight editor: Wang Qiujia.