What Happened Last Week
- SaaS-Pocalypse Now (Redux): AI disruption fears again led investors to sell first and ask questions later in software and other parts of tech.
- Goldilocks Data: Despite tech-led weakness, key macroeconomic data on the labor market and inflation were constructive last week.
- Market Broadening: The equal-weighted S&P 500 and small cap stocks continued to benefit from shifting leadership in the equity market.
What We’re Watching This Week
- Earnings Week Six: Several software names, Walmart (WMT), and other “real economy” names are set to report earnings.
- Investor De-Risking: We are watching for longer-term capital deployment in beleaguered segments as a signal that selling pressure is abating.
- Economic Data: This week will bring survey data, a first look at Q4 gross domestic product (GDP), and the Personal Consumption Expenditures (PCE) Index.
Investment Management Team’s Views
Another week, another tech-led shakeout. Fears around AI disruption again pressured crowded positioning in growth and retail-favored names, culminating in a sharp Thursday selloff. Unlike the prior week, however, Friday’s rebound lacked conviction, leaving the S&P 500 with its largest weekly decline since last November. The weakness in equities stands in contrast to a constructive macro backdrop: payrolls surprised to the upside, the unemployment rate declined for a second straight month, and the Consumer Price Index (CPI) failed to deliver the feared upside inflation surprise. Reports of potential tariff relief on steel and aluminum further eased pressure, pushing expectations for additional rate cuts higher and sending the policy-sensitive 2-year yield to its lowest level since 2022.
We view the recent market correction as a rotation, not a deterioration, in the equity outlook. While headline indices remain vulnerable given their heavy concentration in mega-cap tech, underlying breadth continues to improve. The average domestic large-cap stock rose last week, small-caps have been more resilient than the major benchmarks, and international equities continue to lead, extending their year-to-date outperformance versus the S&P 500 to more than 8%. In our view, volatility in the concentrated indices is a byproduct of capital rotating out of crowded AI- and retail-driven trades and into areas with more attractive valuations and stronger relative momentum. That is a healthier market dynamic than one driven by narrow leadership, and we are encouraged to see diversification working again.
With the earnings season now three-quarters complete, overall earnings growth has been strong. However, for many legacy software systems and other areas at risk of AI disruption, the question is now existential rather than about next quarter’s projections. This week’s earnings reports from a diverse set of software names are likely to receive elevated scrutiny as investors ask difficult questions about the long-term outlook. We are monitoring the recent price action and looking to sift through the rubble as investors sell first and ask questions later. Beyond the ever-evolving story in tech and AI, it will be a busy week for economic data releases, with business surveys, fourth-quarter GDP, and the Fed’s preferred inflation gauge all set to be released.