Homebuilder stocks surge as AI jitters drive bond yields lower

Homebuilder stocks climbed Thursday as falling interest rates and a rotation away from artificial intelligence shares provided a fresh catalyst for the sector. The State Street SPDR S&P Homebuilders ETF, ticker XHB, finished the day up 3.8 percent, bucking a broader trend where the Nasdaq Composite dropped 2.6 percent to its lowest level in more than a month.

The move in homebuilders was driven by specific gains in individual names, with Lennar rising 9 percent, RH up 9.5 percent, and Pool Corporation jumping 14.4 percent. These gains occurred even as the housing sector has generally struggled, suggesting investors are positioning for a potential improvement in conditions if rates continue to decline.

The shift follows a recent period of volatility in AI-related equities. CoreWeave fell to its lowest level since shortly after its initial public offering after bond yields spiked to as high as 15 percent. Meta Platforms dropped 7 percent despite a strong earnings report, a reaction attributed to its first quarter of negative free cash flow in company history, which reflected a surge in spending on AI infrastructure capital expenditures.

While demand for AI compute remains strong with supply chain bottlenecks in memory indicating demand exceeds supply, investors have grown skeptical about the return on investment for companies like Meta and CoreWeave, particularly as interest rates have surged. This skepticism has accelerated a rotation out of tech stocks and into bonds, where yields have recently come down.

The benchmark 10-year Treasury yield fell by 3.8 percent to 4.95 percent, marking its first time below 5 percent in a month and a 7 percent decline over the last two weeks. This drop follows a period where yields had risen on concerns about inflation, the war in Iran, AI spending, and statements from new Federal Reserve Chair Kevin Warsh regarding the benchmark Fed funds rate.

Market expectations for Federal Reserve policy have also shifted significantly over the past month. A month ago, investors believed another rate hike in October was more likely than not. Following weak jobs growth in September and cooler-than-expected PCE inflation in August, investors now see a 93 percent chance that the Fed holds rates steady at 375 to 400 basis points. While rates are still expected to rise over the next year, near-term projections remain difficult to predict.

This pattern of rotation into beaten-down sectors is not new. Earlier this month, apparel stocks such as Nike, Lululemon, and Deckers Outdoor jumped in a single session on similar dynamics. The current move into homebuilders suggests investors are looking for the next set of winners after AI, favoring stocks that have struggled in anticipation of falling rates if inflation continues to cool and AI growth worries persist.