A clear capital rotation emerged last week, with semiconductors weakening while software and defensive sectors attracted buying interest. The semiconductor ETF SMH retreated by more than 4% as the software ETF IGV advanced by 3.9%, a move tied to a sizable uptick in Accenture that sparked renewed interest in software and SaaS names.

The primary driver appears to be the rising cost of capital. Building AI data centers already requires billions in investment and the increase in borrowing costs is raising those financing bills. Long term bond yields are signaling that investors are demanding higher returns on capital right now. Government spending and persistent inflation dynamics are adding to that pressure.

A related, concrete example surfaced in Australia where a data center company backed by Nvidia, Firmus Technologies, canceled a roughly $5 billion IPO after failing to attract sufficient investor interest at its proposed valuation. The company had been valued at tens of billions despite only a fraction of its planned data center capacity being operational, with the remainder requiring additional financing and years of construction before producing meaningful returns.

That episode underscores a broader theme: investors appear to have paid peak prices for portions of the AI buildout and are now asking to see returns. Market participants are reassessing valuations where large capital spend and long timelines reduce near-term visibility on profits.

Capital did not leave the market entirely. Software gains were complemented by moves into utilities and consumer defensive stocks, signaling a shift toward more predictable business models. These sectors advanced as buyers looked for steadier cash flow profiles amid funding cost uncertainty.

Earnings will be a catalyst in the near term. ASML and TSMC are scheduled to report results this week, and strong prints from these names could reenergize the semiconductor complex. TSMC in particular is singled out within the industry for its importance to the supply chain and investor attention.

Inflation remains the central macro benchmark to watch. Oil prices are elevated and the FOMC minutes showed members are still considering additional tightening if needed. This week's inflation readings could influence whether another interest rate increase is contemplated at the October FOMC meeting.

SPY continues to hold its breakout range, supported by rotation into companies that are beginning turnarounds. While long term bond yields are above 5% and that raises the bar for further gains, maintaining these highs despite pressure is being interpreted as evidence of underlying buyer strength. The authors described their stance as cautiously bullish while favoring names that had fallen out of favor earlier in the cycle.