October Observation of US Stock Sector Rotation: AI Trend Expansion and Defensive Revaluation, Segmented Following Strategy by Hong Kong and Taiwan Capital

As we enter mid-October, what warrants the most attention in the US stock market is not the daily index movement, but the migratory paths of capital between sectors. While the index level appears calm, the divergence at the sector level is quite intense: hot spots within the AI industry chain are rapidly switching, interest-rate sensitive assets are fluctuating with expectations of rate cuts, and defensive sectors are acting as stabilizers at critical moments. For cross-border investors represented by Hong Kong and Taiwan capital, this pattern of "calm indices, lively sectors" is precisely the main source of structural excess returns. Rather than guessing index levels, one should understand the rotation and follow it. Three Macro Logics Behind the Rotation Any sustained sector rotation is driven by macroeconomic variables. The current rotation structure in the US stock market can be summarized by three interwoven logical threads. First, the repeated revisions of interest rate expectations. The Federal Reserve's pace toward an easing cycle is not smooth; every release of inflation and employment data changes the market's pricing of the interest rate path. When expectations of rate cuts heat up, growth stocks and long-duration assets benefit; when expectations fluctuate, capital temporarily flows back to defensive assets with stable cash flows. This oscillation itself is the engine of rotation. Second, the horizontal diffusion of the earnings cycle. Over the past two years, US stock earnings growth has been highly concentrated in a few AI computing power leaders, and the market breadth has consistently been criticized. As the Q3 earnings season progresses, investors are beginning to test whether earnings improvement can spread from tech giants to broader industries such as finance, industry, and healthcare. Whether the "width" of earnings can open directly determines the sustainability and height of the rotation trend. Third, the industry chain transmission of AI capital expenditure. Large-scale investments by cloud computing vendors and semiconductor companies are being transmitted sequentially through chips, servers, power equipment, data center infrastructure, and software applications. Each round of transmission spawns a batch of new beneficiary sectors, which is why the AI trend can continuously "self-update." Three Key Rotation Themes to Track The AI trend is still the strongest industry theme in the US stock market, but its internal structure is undergoing subtle changes. The early pattern, dominated solely by chips and computing power equipment, is gradually giving way to a more balanced picture: the power and utility sectors are being revalued due to surging data center electricity demand, and electrical equipment and construction service providers in the industrial sector are continuously absorbing capital expenditure from tech giants, while software and internet platforms are awaiting validation data from AI monetization. For investors, this means that configuring AI is no longer limited to the "buy chips" path; the industry chain depth offers richer choices. Interest-Rate Sensitive Sectors Enter a Revaluation Window If the easing path continues, interest-rate sensitive sectors such as finance, real estate, and utilities have systemic revaluation potential. Investment banks and asset management companies benefit from the recovery in capital market activity, and the asset quality pressure of regional banks eases with falling interest rates. The valuation constraints of REITs also loosen as financing costs improve. These sectors have a low correlation with the AI theme and naturally possess diversification value in a portfolio. Defensive Sectors Shift from "Safe-Haven Tools" to "Ballast" Healthcare, consumer staples, and high-dividend assets need to be redefined in the current market cycle. While they may not be the sharpest offensive spear in the rotation, in the context of high concentration and potential volatility in the technology sector, defensive assets are key to controlling portfolio drawdowns. Hong Kong and Taiwan investors, constrained by exchange rates and liquidity, generally have a lower tolerance for drawdowns than domestic US institutions, making the strategic importance of defensive positioning even more pronounced. Three-Step Framework for Hong Kong and Taiwan Investors Following Sector Rotation Step 1: Identifying the Rotation Start Point with Three Types of Signals Relative Strength Curve: Observe the relative strength performance of industry indices against the S&P 500. The relative strength line of a strong sector often precedes price highs and is the most classic leading indicator. Trading Volume and ETF Fund Flows: Changes in the share and trading proportion of industry ETFs are the most direct window into capital migration. Sustained capital inflow usually precedes the market development of a sector. Volatility Signals: When the VIX rises rapidly and defensive sectors show relative strength, it often signals that capital is shifting from offensive to defensive assets. At this point, one should examine whether the portfolio's offensive positions are overly concentrated. Step 2: ETF as the Base, Individual Stocks for Enhancement For cross-border investors, directly trading individual US stocks involves multiple constraints such as temporary differences, exchange rates, and transaction costs. A more pragmatic approach is to build a base position using industry ETFs to lock in the overall beta of the sector, and then use a small number of leading stocks with clear industry logic for yield enhancement. The base position seeks stability, while the enhancement seeks progress, avoiding betting all chips on a single hot topic and preventing forced frequent trading due to intraday volatility. Step 3: Pre-setting Rebalancing and Exit Discipline The biggest risk in a rotation market is "chasing highs." It is recommended to set two disciplines for every rotational position: first, setting a maximum position limit for a single industry to prevent the portfolio from being hijacked by a single theme; and second, clarifying exit rules. When the relative strength line breaks below the moving average, or when an industry ETF shows continuous net capital outflow, reduce positions as planned rather than hesitating in the moment. The essence of rotation is capital migration; capital departure requires no justification, and investor discipline must precede emotion. Observation Checklist and Risk Warning for the Coming Weeks Looking ahead, three types of events will directly influence the rotation rhythm: first, the earnings and guidance of large financial institutions during earnings season, which are the first checkpoints for testing profit diffusion; second, inflation and employment data, which will dictate the direction of interest rate expectations; and third, the latest statements from tech giants regarding capital expenditure during earnings releases, which directly determine the sustainability of the boom in the AI industry chain's upstream and downstream sectors. Before these key nodes materialize, the index level is likely to maintain range-bound fluctuations, and structural opportunities at the sector level will still be more abundant than trend-based opportunities at the index level. At the same time, two types of risks must be guarded against: if there are signs of a slowdown in AI capital expenditure, concentrated technology sectors may undergo sharp adjustments; if inflation proves persistent and undermines expectations of easing, the revaluation logic of interest-rate-sensitive sectors will be falsified. For Hong Kong and Taiwan investors, maintaining adequate cash flexibility, controlling exposure to a single theme, and adhering to phased accumulation are prerequisites for controlling drawdowns and retaining profits in a rotational market. Conclusion: The keywords for October US stocks are not "rise" or "fall," but "shift." Capital is redeploying across three fronts: AI deep tech, interest rate sensitivity, and defensive assets. For cross-border investors, rather than trying to predict the peaks and troughs of indices, it is better to establish a rotation-following system of "signal identification—phased accumulation—disciplined exit," which is the true direction indicated by the current US stock market trend.