Investors Shift to Defensive Stocks Amid AI Safety Concerns

Wall Street moved funds out of AI infrastructure stocks and into defensive plays on Monday. The shift followed a weekend essay by Anthropic CEO Dario Amodei urging the industry to slow model development.

The S&P 500 and Nasdaq recovered from early declines as U.S. Treasury yields briefly rose above 5% before falling. Traders weighed the possibility of Federal Reserve rate hikes this week, with CME Group's FedWatch showing a 92%+ probability of an increase ahead of the meeting.

Investors shifted to safe havens: Johnson & Johnson and Eli Lilly rose in healthcare, while Kimberly-Clark and Costco gained in consumer staples. Costco saw notable gains earlier this week. These stocks tend to hold up better than high-growth tech during economic tightening, with less impact from this year's AI-driven capital expenditure cycle.

The broader sell-off in AI-related stocks intensified after Sunday night futures market turbulence triggered by concerns over slowing AI growth. Cybersecurity stocks and hyperscalers also rose: CrowdStrike and Palo Alto Networks each gained around 14%, reflecting heightened demand for security spending amid AI safety worries. Meta Platforms, Alphabet, and Microsoft also climbed alongside them as investors anticipated reduced capital expenditure and debt burdens if AI development slows.

This could allow more time to close the gap between AI investment and free cash flow. However, AI infrastructure expansion remains constrained by supply shortages; a temporary pause in model development might leave hardware and data center capacity unable to keep up with demand. Amazon also rose but faced headwinds from its large retail business.

Oil prices gave back some early gains, though West Texas Intermediate crude remained above $100 per barrel. Bond markets partially defended Monday's losses as U.S. economic data releases are scheduled for the week ahead of Wednesday's Fed decision.