Key Highlights

● Fortinet tumbled Friday as a late-day wave of software selling spread to cybersecurity.

● No company-specific news was reported for the network security company.

● A software basket lost roughly $130 billion, with 41 of 45 stocks falling.

● Big Tech earnings begin Oct 21, and the Fed decides on rates Oct 28.

Cyber names hit hard

Fortinet (NASDAQ:FTNT) tumbled on Friday, falling to $168.62 late in the session, according to market data. The network security company was one of the hardest-hit cybersecurity stocks on the S&P 500 as selling in software spread across the group.

A market recap tied the cybersecurity selling partly to a vulnerability disclosure from Palo Alto Networks (NASDAQ:PANW), which it said weighed on the group. No company-specific news was reported for Fortinet itself.

Fortinet sells firewalls, network security appliances and a growing range of cloud-based security software to businesses and governments. Its FortiGate firewalls are among the most widely deployed in the industry.

A sector-wide retreat

Fortinet had plenty of company. Reports indicated that CrowdStrike (NASDAQ:CRWD) fell sharply late in the session, and market data listed Palo Alto Networks among the hardest-hit names. Zscaler (NASDAQ:ZS) slid and Okta (NASDAQ:OKTA) sank, while SentinelOne (NYSE:S) and Qualys (NASDAQ:QLYS) also fell.

The selling in cybersecurity was part of a broader rout in software. Per market data, 41 of 45 stocks in a software basket fell, erasing roughly $130 billion in value. ServiceNow (NYSE:NOW) slid, Snowflake (NYSE:SNOW) tumbled and Palantir Technologies (NASDAQ:PLTR) slid into correction territory relative to its Oct 9 record. The selling intensified late, with the S&P 500 suffering its steepest losses in the final hour.

The AI financing question

The software selloff came against the backdrop of a reassessment of the AI trade. Market commentary said investors have shifted from asking what AI can do to asking how its infrastructure will be financed. Debt-funded AI infrastructure companies fell hardest, and software companies whose valuations rest on AI-driven growth were swept up in the selling.

One market commentator said, "The AI group is now splitting between companies that can fund the buildout themselves and those that have to borrow."

Higher long-term rates also weighed on growth stocks. A head investment strategist at the Franklin Templeton Institute said that "pressure across the long end of the curve acts as a valuation headwind for risk assets." The 10-year Treasury yield eased to roughly 5.1 on Friday but topped 5.3 earlier in October, its highest since 2002.

Market close

The S&P 500 fell 84.62 points to 7,659.44 after opening higher, ending a 55-session stretch without a steep daily drop, according to market reports. The Nasdaq Composite dropped 572.99 points to 26,140.03, and the Dow Jones Industrial Average slipped 175.28 points to 52,002.41. All but seven of the 75 S&P 500 technology stocks closed lower.

Energy, utilities and consumer staples gained as investors moved into defensive areas, and health care hit records. Brent crude climbed $3.94 to $109.86 a barrel on attacks on tankers in the Strait of Hormuz. The VIX volatility index jumped 3.53 points to 19.99, after touching 22.31 intraday, its highest since June 11.

Federal Reserve Chair Kevin Warsh, speaking at an IMF gathering in Bangkok, declined to preview the central bank's October decision. "I don't prejudge meetings," he said.

Palo Alto Disclosure and Fortinet Outlook

Investors will look for any further detail on the Palo Alto Networks disclosure and how it affects the group. The Federal Reserve's next rate decision is due Oct 28, and the PCE inflation report and the first estimate of third-quarter GDP follow on Oct 29. Big Tech earnings start next week, with Meta (NASDAQ:META), Tesla (NASDAQ:TSLA), IBM (NYSE:IBM) and SAP (NYSE:SAP) reporting on Wednesday, Oct 21, offering a read on corporate technology budgets.