@theMarket: No Valentine for Artificial Intelligence

The ongoing debate about the high spending by AI companies is intensifying, but a broader thesis is emerging. AI is now casting uncertainty across more industries, unsettling investors and markets alike.

 

Software stocks have been the most obvious area of concern. The sector, and Microsoft in particular, has seen relentless selling. However, other areas, from finance to accounting to insurance, are increasingly being questioned.

 

As a result, this week it has been a game of moving chairs, where suddenly a story appears touting a breakthrough in an accounting or finance tool. Down goes brokerage stocks. Anthropic PBC, an AI research and development startup, recently announced Claude 4.1, an AI chatbot that makes writing tasks easier. OpenAI, their competitor, offers ChatGPT, which is churning out outputs that analysts expect will disrupt industry after industry over the next two years.

 

No one really knows who the winners and losers in this AI threat will ultimately be, but short-term traders are taking advantage of the uproar while roiling the markets. As I warned, February is turning out to be a volatile month in any case.

 

Two macroeconomic events contributed to the market's gyrations this week. The delayed non-farm payroll report for January was an upside surprise, adding 130,000 new jobs versus expectations of only 55,000. Market participants did not like the number because stronger job growth reduces the reasons for the Federal Reserve Bank to lower interest rates.

 

On Friday, the Consumer Price Index for January was slightly weaker than expected, rising 2.4 percent year over year. Markets liked that result since it sort of balanced out the picture for the Fed. Weaker inflation, stronger labor gives the Fed some room to ease, or so the story goes.

 

As for me, I no longer consider the government's data as unbiased. It is an election year, and I expect the administration will tilt the numbers to put them in the best possible light. It happened under the previous president, and it will happen under the next president.

 

To me, the numbers were much ado about nothing. The expectations that the Fed will ease before June are quite low in the betting market. I concur. After the new Fed Chair takes his seat, then monetary policy will ease, and not before. That leaves me focused instead on geopolitics, trade policy, and how much the government can spend to boost the economy.

 

The fear that the U.S. will take military action against Iran as early as this weekend has supported energy prices. Anything can happen, but somehow, I don’t think another strike is in the cards, at least not now.

 

As for the overall market, this week saw the momentum winners of last year get hit one by one. Software, then hardware, financials, real estate, and consumer discretionary all got taken to the woodshed. Even metals and mining stocks experienced steep one-day declines with little or no reason.

 

The hysteria that AI is "coming for Wall Street" will likely continue. In my opinion, anyplace that relies on structured, repetitive workflows will be disrupted. Those that offer a human connection and add value will be enhanced and benefit from AI. But in the meantime, rotation in and out of various sectors will provide opportunity for traders and volatility for long-term holders. We are in a trading range. I expect that will be the playbook for the rest of the month.