Key Highlights

● Zscaler slid with cybersecurity peers, and no company-specific news was cited.

● Fortinet, CrowdStrike, Palo Alto Networks, Okta and Qualys also fell.

● Varonis rose after Proofpoint agreed to buy it for $49.75 a share in cash.

● Meta reports Oct 21, alongside IBM and SAP; the Fed decides Oct 28.

Caught in the rotation

Zscaler (NASDAQ:ZS) slid in Friday's session, finishing among the notable decliners on the Nasdaq-100. According to market commentary, the cloud security company fell as part of what it described as an AI-financing rotation, in which investors sold growth and technology names amid questions about the debt funding behind artificial intelligence spending. Zscaler moved with its sector, and no company-specific news was cited.

Zscaler provides cloud-based security services that protect users, applications and data as companies move workloads away from traditional networks. Its shares, like those of many high-growth software companies, are closely tied to sentiment about technology spending and to the valuations investors are willing to pay for future growth.

Cybersecurity sold off across the board

Zscaler was far from alone. Fortinet (NASDAQ:FTNT) tumbled to $168.62 late in the day, according to market reports. CrowdStrike (NASDAQ:CRWD) fell sharply late in the session, and Palo Alto Networks (NASDAQ:PANW) was among the hardest hit. A market recap linked part of the selling in security names to a Palo Alto vulnerability disclosure.

Okta (NASDAQ:OKTA), the identity-management company, sank to $186.72, with declines also reported in Qualys (NASDAQ:QLYS) and SentinelOne (NYSE:S). One bright spot in the group was Varonis (NASDAQ:VRNS), which rose after Proofpoint agreed to buy it for $49.75 a share in cash, about $6.3 billion.

From what AI can do to how it gets paid for

The broader driver was a shift in market psychology. Investors moved from asking what AI can do to asking how it will be financed, according to market commentary. Debt-funded AI infrastructure names such as CoreWeave (NASDAQ:CRWV) bore the brunt, and selling spread to software and security companies. Market reports said the rotation erased more than $1 trillion from semiconductor and AI-related stocks that week.

Goldman Sachs published a note describing hedge funds' selling of AI names as a "tactical rotation." In a 45-stock software basket, 41 names fell, erasing roughly $130 billion in value.

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

Index damage

The Nasdaq Composite fell 572.99 points to 26,140.03, and the Nasdaq-100 dropped sharply as well, though sources differed on the size of its decline. The S&P 500 lost 84.62 points to 7,659.44, and the Dow Jones Industrial Average slipped 175.28 points to 52,002.41. Technology was the weakest sector, while energy, utilities and consumer staples posted gains.

The session had opened on a firmer note before selling built through the afternoon. The VIX climbed 3.53 points to 19.99 after touching 22.31 intraday, its highest level since June 11. For the week, the Nasdaq Composite had its worst performance since the week ended June 26.

Cyber Selling Meets Big Tech Earnings

On the macro side, the Federal Reserve's next decision is due October 28. Fed Chair Kevin Warsh declined to preview it at an IMF gathering in Bangkok, saying, "I don't prejudge meetings." PCE inflation data is due October 29, and the 10-year Treasury yield, which eased to roughly 5.1 on Friday, remains a key influence on growth-stock valuations.

Cybersecurity investors will be watching whether the selling deepens or stabilizes as earnings season accelerates. Big Tech results from Meta (NASDAQ:META) on Wednesday, October 21, and from IBM (NYSE:IBM) and SAP (NYSE:SAP) the same evening, could offer clues on enterprise technology spending, according to earnings calendars.