Wentz Weekly: Stocks Down As AI Fears Spillover Beyond Software

Wentz Weekly Insights
Stocks Down As AI Fears Spillover Beyond Software

Artificial intelligence worries carried over into last week with technology continuing its selloff, leading to a 2.10% decline in the Nasdaq, the worst performing of the four major US indices and the fifth straight weekly decline. Small caps and value names held up the best as the rotation continues, with the Russell 2000 index down 0.89%, while defensive and value focused sectors like utilities and real estate were up 7.13% and 3.87%.

As mentioned, the turmoil in the technology sector continued last week, but also spread beyond software, into financials including insurance companies, financial services, real estate, and freight brokers. The latest trigger was from the announcement of new AI tools including from an AI related insurance startup Insurify, a tax planning chatbot from Altruist, and Algorhythm – an AI company focused on scaling freight volumes.

The increased volatility in these sectors reflect the fear that artificial intelligence (the announcement of new tools from AI companies) is ready to disrupt these industries so significantly that investors are selling the stocks even those at the slightest risk of being impacted by AI.

The worries are also building within the mega cap tech companies that are currently spending billions to build out the infrastructure that AI runs on. Investors are beginning to question whether the hundreds of billions of dollars these companies are investing in AI will deliver returns any time soon. As mentioned in last week’s newsletter (here), the top five hyperscalers (cloud computing companies that own and operate data centers than house and operate AI workloads including Microsoft, Amazon, Alphabet, Meta, and Oracle) plan to spend a staggering $710 billion this year on AI. The mega cap companies investing the most in AI have already shed over $1 trillion in market capitalization due to these worries as investors lose patience.

It’s a big shift in sentiment than what has been seen the past several years when AI related stocks boomed over the speculation the new technology would lead to a new productivity boom. However, that is leading to a major rotation in the markets that is benefiting stocks that have struggled to keep up over the same period.

Societe Generale compiled data that showed the small cap index has outperformed the tech-heavy Nasdaq by about 13% over the past six months, the strongest relative performance in at least five years, marking a sharp reversal from the market trend that has occurred since 2023 where tech, growth, and large caps have significantly outperformed small caps. The Nasdaq is up a cumulative 122% since the beginning of 2023 (through 2025) while the small cap oriented Russell 2000 index is up 43%. In another example, the market cap weighted S&P 500 index is up 78% while the equally weighted S&P 500 is up 43% over the same period.

In addition, breadth is improving – almost 2/3 of the S&P 500 index is now outperforming the index, suggesting more names are participating in the upside. The S&P 500 index is down 0.1% year-to-date while the equally weighted index (where all 500 companies receive an equal weight of 0.2%) is up 5.8%.

Markets not only have to work through the uncertainty on how AI progresses but also a new Fed Chairman. According to Alexander Altmann, Barclays Plc’s global head of equities tactical strategies, the S&P 500 historically has dropped 16% within six months following the appointment of a new Federal Reserve Chair. He notes that data since 1930 shows average drawdowns of 5%, 12%, and 16% over the one-, three-, and six-month periods after a new Fed Chair takes office, so we expect some choppiness to continue over the next several months.

Meanwhile, last week we received two of the most important monthly data releases in the same week, with the labor report on Wednesday and inflation report Friday, however the impact on the markets was muted.

The monthly employment report, which was delayed one week due to the brief government shutdown the beginning of February, saw 130,000 new payrolls in January, much more than the 60,000 expected. Government saw a loss of another 34,000 jobs, now totaling 327,000 lost since the peak late 2024.

The bigger news came from the annual benchmark revisions, due to the Bureau of Labor Statistics replacing survey based estimates with comprehensive employment counts from administrative records from state unemployment data. The final revision showed payroll growth was overstated by 898,000 in the year ending March 2025. There was also the revision to 2025 due to an update in the birth/death model with payroll growth revised to 181,000, down from 584,000.

Inflation was the other notable data released last week but, similar to the jobs data, did not impact markets. The consumer price index rose 0.2% in January and 2.4% over the past year, decelerating from 2.7% the prior month. Core prices, which exclude food and energy, rose 0.3% in the month and 2.5% over the past year. Inflation continues its slow deceleration but inflation for services remains high – rising 3.4% over the past year.

No big events are scheduled this week, but there are many more earnings reports and a big wave of economic data – including delayed reports. The most notable include the first estimate on fourth quarter GDP, expected to be 2.8%, trade deficit, and personal income and consumer spending.

Recent Economic Data

• Employment Report: The monthly employment report, which was initially scheduled to be released last February 6, saw 130,000 new payrolls in January, almost double the increase that was expected. Health care saw the most job gains at 82,000, followed by social assistance with 42,000 with the government seeing a loss of 34,000 jobs, with government jobs 327,000 less than the peak late 2024. At the same time, the household survey showed the number of people employed increased 528,000 and the number of people unemployed declined 141,000, resulting in a 0.1% decline in the unemployment rate to 4.3%. The average wage increased 0.4%, up from the 0.1% increase in December, with the annual change at 3.7%. Additionally, as part of its annual benchmark revisions, 2025 was not nearly as good for job gains as we initially thought (it actually was weaker to begin with). The revisions showed payroll growth was overstated by 898,000 in the year ending March 2025. Also, due to updates in its birth/death model, payrolls increased by just 181,000 all of 2025, well below the 584,000 initially estimated.

• Employment Cost Index: The employment cost index showed total employee compensation costs increased 0.7% in the fourth quarter (seasonally adjusted), slightly lower than the 0.8% increase expected and the lowest quarterly increase since 2020 as employee costs continue to cool from the above average post-pandemic growth. Wages and salaries, the largest component, increased 0.7% while benefit costs increased 0.7% in the quarter. For calendar year 2025, compensation costs increased 3.4%, a slight slowdown from mid-year, with wages and salaries up 3.3% and benefits up 3.4%.

• Consumer Price Index: Inflation was slightly lower than expected in January. The consumer price index increased 0.2% in January, a little below the 0.3% increase expected. Energy prices held down the index, declining 1.5% in the month, while food price increased 0.2%, coming after a hotter 0.7% increase in December. Excluding these two volatile categories, inflation increased 0.3% as expected. New vehicle prices rose only slightly while used vehicle prices fell 1.8%, apparel was up 0.3% and medical care was down 0.1%. The largest category by far, shelter, increased just 0.2%, a cooler reading than what we’ve seen the past several years. Inflation is 2.4% over the past 12 months, cooling from 2.7% the prior two months, while the annual reading for core prices was 2.5%, cooling from 2.6% the prior two months. Finally, inflation in the services sector continues to run hot, rising 0.3% in the month and 3.4% over the past year.

• Retail Sales: We saw a little weakness in retail sales in the last stretch of the holiday shopping season, a possibility people continue to shop earlier, pushing sales up. Retail sales were unchanged in December, a disappointment compared to the 0.4% increase that was expected and the worst month since May. Vehicle sales fell 0.2% while gasoline sales increased 0.3%. Excluding these two categories retail sales were still flat in the month. Just 5 of the 13 major retail categories were positive in the month, led by growth in building materials/garden and sporting goods/hobby sales. Declines were led by furniture, miscellaneous stores, electronics, and apparel sales. Compared to 12 months earlier, retail sales were up just 2.4%. After adjusting for inflation of 2.7% (since retail sales are not inflation adjusted), real retail sales are down 0.3% over the 12 month period.

• Existing Home Sales: Existing home sales disappointed in January – dropping 8.4% in the month to a seasonally adjusted annualized rate of 3.910 million units, the largest monthly decline in four years and the slowest pace of sales since December 2023, although seasonal factors like weather could be to blame. Sales are based on closings, so the data represents homes where contracts were signed in November and December which reflects the move lower in interest rates. Sales were down 4.4% from a year earlier. Inventory saw a little improvement in 2025, rising 3.4% over the past year, but down slightly in January to 1.22 million units. Homes are being listed on the market longer, with the average home taking 46 days to sell, up from 41 days 12 months earlier.

• Jobless Claims: The number of unemployment claims filed the week ended February 7 was 227,000, a decline of 5k from the prior week with the four-week average up a little to 219,500. The number of continuing claims was up 21k to 1.862 million while the four-week average declined slightly to 1.847 million, another new 1 ½ year low.

Company News

• OpenAI: CEO of OpenAI, Sam Altman, told employees that ChatGPT, the company’s chatbot, is “back to exceeding 10% monthly growth,” according to a company Slack message seen by CNBC. The company is also planning to release a new updated chat model. It said more than 800 million people use ChatGPT weekly, however Google’s Gemini and Anthropic’s Claude are gaining share. The battle between AI models is heating up after Anthropic targeting OpenAI in a Super Bowl ad about its decision to run ads on ChatGPT, in which Altman said OpenAI will never run ads in the way Anthropic depicted them. Separately, Bloomberg reported OpenAI is warnings US lawmakers that DeepSeek, a Chinese AI company, is using unfair and sophisticated methods to extract results from US models to train its next generation of its chatbot.

• Anthropic: AI startup and maker of Claude, Anthropic, said it closed its latest round of funding that raised a more than expected $30 billion, valuing the company at $380 billion and making it one of the largest private companies.

• Alphabet: Alphabet said it has sold $20 billion in bonds to raise cash to fund its AI buildout. Bloomberg said the company is also planning on issuing a 100-year bond, a rare occurrence that last happened in the dot-com era from Motorola. The 100-year bond will be denominated in sterling (British pounds) and has already received 9.5 billion worth of bids for its 1 billion sterling offering. The debt offerings come just a week after Alphabet said it plans to spend $185 billion this year to finance its AI buildout.

• Warner Bros. Discovery: Paramount Skydance has been in a battle with Netflix to acquire Warner Bros. Discovery. The company offered $30 per share to acquire the company and last week added to its offer a “ticking fee” of $650 million, payable each quarter after 2026 if it has not received regulatory approval. Netflix’s offer stands at $27.75 per share in cash.

• Meta: Meta’s auditor, Ernst & Young, reportedly raised red flags over how Meta’s accounting relating to its data centers, according to the Wall Street Journal. The report says E&Y’s concern was over financial engineering the company used to keep a $27 billion data center project off its balance sheet, flagging it as a “critical audit matter,” though it later signed off on the matter. Meta had moved the project off its books in October into a joint venture with Blue Owl Capital (a financing company), with it owning 20% of the venture.

• Apple: Bloomberg reported Apple is pushing back the release date of its long planned upgrade to its Siri virtual assistant, originally expected with its iOS 26.4 update in March, after it ran into snags during testing in recent weeks. The delay will affect the release of several highly anticipated functions as well, including more on-screen personalized content and letting users control apps from their voice.

• Kraft Heinz: Kraft Heinz said it is pausing its plans to split into two companies, citing the deteriorating conditions in the food industry. CEO Steve Cahillane said the challenges in the industry are “fixable and within our control.” The original plan announced in September was to split into two companies – one focusing on groceries and the other on sauces and spreads.

Other News

• China Says Stop Buying US Treasuries: Bloomberg reported China is urging its financial institutions to limit purchases of and to curb its exposure of US Treasuries citing concentration risks and market volatility. They asked banks to gradually reduce their holdings, framing it as a risk diversification measure instead of a loss of confidence in US credit worthiness. Chinese banks hold about $300 billion in dollar-denominated bonds.
• Fed talk: Kansas City Fed president Schmid said the Fed’s current policy rate is arguably no longer restraining economic activity with growth showing momentum and inflation still hot. He sees demand continuing to outpace supply, leading to inflation closer to 3% rather than its 2% target. As such he believes its appropriate to maintain the current policy rate.

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