NEW YORK: An artificial intelligence (AI)-driven shakeout in the heavyweight technology sector is set to keep stock investors on edge this week while a barrage of data could shift focus to the health of the economy.
A deepening rout among software stocks commanded Wall Street’s attention last week, as investors worried about the extent to which AI would upend business models throughout the industry.
Further weakness in the tech sector, which holds massive weight in the major US equity indexes, dragged on the market for much last week.
Last Friday, stocks staged a strong rebound, with the Dow Jones Industrial Average crossing 50,000 for the first time, led by a surge in shares of semiconductor companies.
Below the surface, investors have been encouraged about a rotation from tech to other parts of the market that underperformed for most of the bull market that began more than three years ago.
While tech has struggled, energy, consumer staples and industrials have shined so far this year.
“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.
“At the same time, the bar of expectations seems to be so high for tech that no matter what companies report, it seems like the natural inclination from investors is to take some profits.”
Although the tech sector bounced back last Friday, the group has slid 9% since it peaked for the year in late October.
Over that period, most of the other 11 S&P 500 sectors have posted gains, including four with double-digit percentage rises.
But the benchmark S&P 500 has managed to eke out only a slim increase in that time.
With the tech sector still accounting for about one-third of the weight in the S&P 500, investors fear the index will struggle if tech continues to falter.
“A market can absorb a prolonged rotation with large sector winners without obvious index-level stress for quite some time,” Jim Reid, head of macro and thematic research at Deutsche Bank, said in a note.
“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.”
Stress is bearing down on software, with the S&P 500 software and services index tumbling 15% in a little over a week.
Fears about AI disruption were compounded by disappointing earnings reports including from software giant Microsoft.
This week will feature reports in the software industry from AppLovin and Datadog.
Results are also due from high-profile companies including Coca-Cola, Cisco Systems and McDonald’s as fourth-quarter earnings season winds down.
Monthly reports on employment and consumer prices will be released after both were pushed back slightly due to the recently ended three-day government shutdown.
January’s nonfarm payrolls report, out on Wednesday, is expected to show an increase of 70,000 jobs, according to a Reuters poll. Investors are trying to assess whether weakening in the labour market has tapered off.
While the Federal Reserve (Fed) cited stabilisation in the jobs market as it held interest rates steady last month, a survey last Thursday showed layoffs announced by US employers surged in January.
Meanwhile, inflation remains “somewhat elevated” in the view of the Fed, with the January consumer price index due on Friday offering the latest insight into such trends.
With the Fed describing diminished risks to both inflation and employment, markets are expecting the central bank to hold off on further interest rate cuts until its June meeting. — Reuters
