Investors dumped technology stocks and piled into defensive sectors in October, pushing the MSCI consumer staples index to its largest monthly gain in nearly 30 years — a 10.6 per cent rise — as fears grow that the AI bull market has run its course.

Defensive sectors, including consumer staples, healthcare and utilities, have returned to favour in recent weeks as investors hunt for reliability amid wider global uncertainty. The rotation marks a sharp reversal of the trade that dominated markets for most of the past two years.

The MSCI global healthcare index recorded a 9.8 per cent increase in October, the second-highest monthly gain of the century. Only the start of the Covid pandemic beat it, when the index rose 12.4 per cent in April 2020.

By contrast, the MSCI global technology stocks index has plummeted more than 13 per cent since the start of October.

Why are investors running from tech?

Schroders analysts pinpointed two pressures: stretched valuations and doubts about the money flowing into AI infrastructure. "Investors grew increasingly sceptical of technology sector valuations and questioned the long-term funding plans for the massive AI build-out," they said in a note to investors.

"Amid the major repricing of technology and the countries with tech-heavy equity markets, defensive sectors like energy, consumer staples and healthcare showed notable strength globally," the note added.

The repricing has hit the tech-heavy Nasdaq Composite hard. The index has failed to benefit from the broader search for safety, and the damage has spread to countries whose equity markets carry heavy technology weightings.

Where is the money going instead?

European markets, with their dense populations of consumer staples and healthcare names, have captured the inflows:

• The FTSE 100 gained 1.5 per cent in the last month.
• Germany's Dax jumped 5.1 per cent.
• The Swiss Market Index rose 8.4 per cent, boosted by pharmaceutical firms Roche and Novartis.

Individual consumer staples companies, whose share prices had struggled against rising shipping and energy costs caused by the conflict in the Middle East, also returned to gains. Unilever, which owns brands such as Dove and Vaseline, has posted a 4.1 per cent rise in the last month. Reckitt Benckiser, the owner of Dettol, is up 8.1 per cent, while Diageo has climbed 13 per cent.

US-listed staples posted gains too. Retail giant Walmart has risen more than 15 per cent since the Nasdaq Composite peaked on 6 October, and Coca-Cola has climbed more than 10 per cent.

What are the strategists doing?

Citi analysts dubbed the rotation "violent", but noted that the outperformance could extend into the more cyclical part of the market next year. The bank downgraded a host of US and global tech stocks in the same note.

"Earning revisions have decelerated and AI sentiment has plunged," wrote Beata Manthey, head of European equity strategy at Citi. Mantheby simultaneously upgraded her recommendation on European stocks, excluding the UK, reflecting the region's lighter tech exposure.

Other asset managers have adopted a defensive tilt by reducing US exposure, including Pictet and Blackrock. Some analysts argue the result of the US midterms has accelerated the shift.

The Democrats last week secured a decisive victory, winning key battleground states to take control of both the Senate and the House. The win triggered a sharp AI sell-off, driven by fears the party would halt the pace of data centre construction.

What should investors do now?

Alliance Bernstein advises patience over speed when rebuilding portfolios around the rotation. Kent Hargis, chief investment officer of strategic core equities at the firm, urged investors to take a longer view of their defensive allocations.

"Quality companies with stable businesses that trade at attractive prices have historically held up well in the conditions now taking shape, and offer an attractive risk/reward profile for the market challenges ahead," Hargis said.

For portfolio managers, the practical question is whether October's breakneck rotation marks a durable regime change or a positioning squeeze. Citi's suggestion that outperformance could spread into cyclical stocks next year implies the answer may not be a simple flight to safety.