Stock markets entered the coming week with investors focused on turbulence in technology stocks and an array of economic reports that could reshape views of the U.S. economy. The recent escalation of selling among software companies, driven in part by concerns about how artificial intelligence may reconfigure industry economics, dominated trading discussions.
That weakness in software exerted downward pressure on the markets for much of the week, though a strong bounce on Friday helped stocks pare losses. The Dow Jones Industrial Average crossed the 50,000 threshold for the first time during the rally, boosted by gains in semiconductor shares.
Sector rotation and market breadth
Investors have noted an ongoing rotation away from technology into areas that underperformed during the bulk of the multi-year bull market. Energy, consumer staples and industrials have outperformed so far this year, receiving renewed buying interest as tech cools off.
"Rotation is the dominant theme this year and continues to be as we see these old-economy sectors and stocks really get some love," said Angelo Kourkafas, senior global investment strategist at Edward Jones. He added that expectations for tech appear elevated enough that investors often opt to take profits regardless of corporate updates.
Despite the late-week rebound for technology, the sector has retreated 9% from its year-to-date high reached in late October. By contrast, most of the other S&P 500 sectors have advanced over the same stretch, and four of them posted double-digit percentage gains. Yet because technology still accounts for roughly one-third of the S&P 500’s market capitalization, continued softness in tech could make it difficult for the broad index to sustain gains.
"A market can absorb a prolonged rotation with large sector winners without obvious index-level stress for quite some time," observed Jim Reid, head of macro and thematic research at Deutsche Bank. "However, the longer and deeper the selloff in a dominant sector becomes, the harder it can be for the broader index to withstand the drag."
Pressure concentrated in software
Stress within technology has centered notably on software. The S&P 500 software and services index plunged roughly 15% in just over a week as fears of AI-driven disruption intensified. Those worries were heightened by underwhelming quarterly reports, including results from Microsoft that disappointed some investors.
The episode highlights a shift in investor thinking about artificial intelligence. Where AI-related optimism once lifted most names, market participants are increasingly parsing which companies will be long-term beneficiaries and which may face tougher growth prospects.
"Before, it was 'AI lifted all ships,'" said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. "Now, there are concerns that this massive acceleration in the technology space could cause other businesses to not see the kind of growth rate they did before."
Investors will get more corporate data in the software space next week, with reports due from AppLovin and Datadog. Results from other high-profile companies such as Coca-Cola, Cisco Systems and McDonald’s are also scheduled as fourth-quarter earnings season winds down.
Economic data and Fed implications
A slate of closely watched economic releases follows the recent government shutdown-related delay of monthly reports. The January nonfarm payrolls report is set for Wednesday and a Reuters poll of economists anticipates an increase of 70,000 jobs. Market participants will use the payrolls number to assess whether signs of labor-market softening are abating.
While Federal Reserve officials noted stabilization in the jobs market when they opted to keep interest rates unchanged last month, a separate survey showed a jump in announced layoffs in January. Inflation remains a concern for policymakers as well; the January consumer price index, due on Friday, will provide another read on price trends that the Fed monitors closely.
With the central bank seeing reduced but persistent risks to both inflation and employment, markets are pricing in a delay to additional rate cuts until June. By that point, the nominee for Fed chair, Kevin Warsh, could be in place. Futures traders continue to anticipate about two further quarter-percentage-point rate cuts by year-end, expectations that have not materially shifted since the nomination announcement.
"Rate expectations have been remarkably stable over the last couple of weeks," Kourkafas said. "We’ll see if any either weakness in the labor market data or any surprising cool-down in inflation accelerates a bit the timeline for when the market thinks the next rate cut may be delivered."
Analyst tools and stock evaluation
Some market services are promoting systematic tools to evaluate individual stocks. One such product described in market commentary evaluates Microsoft monthly across more than 100 financial measures, seeking to identify attractive risk-reward profiles. The commentary noted that the tool has previously highlighted winners such as Super Micro Computer and AppLovin based on its evaluation framework.
Readers and investors should note that this description reflects how certain analytic services present their methodology and track record; it is information that investors may consider alongside other data when forming investment decisions.
Looking ahead
Market participants will likely enter the week attuned to developments within technology, particularly software, and to incoming economic readings that could influence monetary policy expectations. The path of sector rotation and the depth and duration of any further tech-oriented selloff will be key variables determining whether gains in cyclical and defensive sectors can offset pressure from a dominant technology group.