Welcome to this week's market recap, where the spotlight once again fell squarely on artificial intelligence. It was one of those weeks we've seen periodically over the last year, especially since late October, where the market grapples with the multifaceted implications of AI.
We observed two primary flavors of concern:
- AI as a Disruptor: The specter of AI fundamentally reshaping industries loomed large. Anthropic's unveiling of a new AI legal tool, for instance, triggered a notable sell-off, particularly in the software sector – even impacting private markets – as investors grappled with the potential for AI to upend established business models.
- AI's Hefty Price Tag: The 'AI is expensive' narrative gained traction. Google announced ambitious plans to double its capital expenditure in 2026, targeting a staggering $175-$185 billion. Similarly, Amazon intends to boost its capex by nearly 60% to $200 billion in the same year. These colossal investment figures renewed worries about the long-term profitability and return on investment for these massive AI initiatives.
Beyond the AI buzz, the labor market presented a mixed, albeit somewhat cautious, picture. We received three key reports, each with its own nuances and caveats:
- The ADP report showed the private sector added a modest 22,000 jobs in January, falling short of the 45,000 expectation. However, it's worth noting that revised monthly gains have shown improvement since last spring, settling into a more stable, albeit lower, trajectory.
- Initial jobless claims climbed to 231,000, significantly higher than the anticipated 212,000. While this might seem concerning, we must factor in potential distortions from winter storm Fern and unusually cold weather, which likely impacted these numbers.
- JOLTS job openings surprised to the downside, coming in 700,000 lower than forecasts. Yet, this doesn't quite align with private sector data, like that from Indeed. Crucially, the hiring rate actually rose, and the layoff rate remained remarkably steady at historically low levels, suggesting underlying resilience despite the headline miss.
So, what was the market's verdict? Even with a modest bounce today, software stocks finished the week down a notable 9%. The broader Nasdaq-100® (our blue line on the charts) also felt the pressure, closing down 2%. Interestingly, 10-year Treasury yields (our black line) dipped by about 5 basis points to 4.2%, perhaps reflecting a flight to safety amidst the uncertainty.
Looking ahead, my radar is tuned to several key economic indicators that could shape market sentiment next week:
- Wednesday's January nonfarm jobs report will provide a clearer picture of employment trends.
- Friday's January CPI report will be crucial for inflation expectations.
- Also on the docket are Tuesday's December retail sales figures, the Q4 employment cost index, and the January NFIB small business optimism report – all vital pieces of the economic puzzle.
By Nassim Dergham
