S&P 500 Erases Nearly 1% Drop Amid AI Volatility: Markets Wrap

(Bloomberg) — Traders struggling to assess the outlook for artificial intelligence sent Wall Street to another volatile day, a session that saw big losses in stocks erased by midday. Gold and silver tumbled.

Following a slide that approached 1% earlier Tuesday, the S&P 500 edged up. The index bounced after briefly breaching a key technical level. While the UBS US AI Winners Index wiped out a 2.3% plunge, an ETF tracking software firms slipped 2%. Anthropic PBC is releasing a new AI model intended to be better at using computers in increasingly complicated ways.

The turmoil unleashed by AI reflects fears that are increasingly at odds. One is that it’s poised to disrupt entire segments of the economy so dramatically that investors are dumping the stocks of any company seen at the slightest risk of being displaced by the technology. The other is a deep skepticism that the hundreds of billions of dollars spent in AI will deliver big payoffs anytime soon.

In what’s turning out to be a great quarter for corporate earnings growth, mentions of AI disruption on management calls almost doubled compared to the previous quarter, a Bloomberg News analysis of transcripts shows. While the technology hasn’t yet noticeably reduced earnings estimates, investors aren’t waiting around and instead are selling any company perceived to be at risk.

Markets could face more near-term volatility because of concerns about AI disruption and capital expenditures, “weak seasonals and crowded momentum trades,” according to Morgan Stanley’s Michael Wilson.

“The market is still close to records highs, but it may not feel that way to some investors because of the sharp selloffs that seem to derail upswings almost as soon as they begin,” said Chris Larkin at E*Trade from Morgan Stanley. “If that theme persists, it could result in a bumpy road for the market, even if the overall trend is to the upside.”

Traders this week will also be on the lookout for economic data and minutes from the Federal Reserve’s January meeting for insights into the timing for rate cuts.

Fed Governor Michael Barr said rates should remain steady until officials see more evidence that inflation is heading toward the central bank’s 2% target. Separately, Federal Reserve Bank of Chicago President Austan Goolsbee told CNBC there is potential for more rate cuts this year, if inflation continues to return towards the goal.

The S&P 500 hovered near 6,860. The yield on 10-year Treasuries was little changed at 4.06%. Bitcoin fell to around $68,000. The dollar wavered. The pound slid as data showing UK unemployment at a five-year high prompted traders to boost bets on rate cuts.

Oil slipped on signs that the US and Iran have made progress in nuclear talks. Gold sank below $4,900 an ounce, with much of Asia, the top consuming region, closed for the Lunar New Year. Silver also retreated.

It is likely that we will look back on the current volatility as a buying opportunity, though it’s difficult to estimate when the volatility will be behind us, according to veteran Wall Street strategist Louis Navellier.

“We need tech/AI/Mag 7 to stabilize, and need to see less ‘sell first/ask questions later’ behavior from investors,” said Sameer Samana at Wells Fargo Investment Institute.

The AI narrative appears to be evolving from an all-encompassing force that drives major stock averages higher to one in which “selectivity” among winners and losers possibly becomes an increasingly critical factor in shaping how an investor’s portfolio performs this year, according to Anthony Saglimbene at Ameriprise.

“Thus, we believe the next phase of the AI cycle could be shaped by a combination of how investors react to big-tech trends as well as how a broader set of companies and industries navigate an environment where technological disruption and innovation possibly spreads faster than many expected,” he said.

However, Saglimbene believes the “knee-jerk” negative reactions seen in areas like software and financial services over recent days and weeks are likely “overdone,” and opportunities in “well-established, well-run companies” are starting to emerge for those willing to see through the volatility.

“In our view, this is an opportune time to ensure you have included high-quality actively managed equity strategies within your portfolio to help your portfolio navigate this increasingly complex market environment,” he noted.

“First, the AI-blamed selloff started with the software industry, triggering renewed fears that AI companies will adversely affect their businesses,” said Sam Stovall at CFRA. “Soon after, the sector version of ‘Whac-a-Mole’ kicked in, initiating rolling corrections in such groups as transportation, wealth management, insurance, and commercial real estate in succession, causing investors to wonder: Where next?”

Stovall cautions investors against getting caught up in the emotional instability generated by these selloffs.

“They remind us that AI will indeed offer cost savings from increased efficiencies and depth of analysis, but these should aid companies by making them nimbler and more profitable,” Stovall added. “Today, the equity markets are going through a much-needed digestion of gains.”

A record number of investors say companies are spending far too much, according to Bank of America Corp.’s latest fund manager survey. While investors participating in the survey are the most bullish they’ve been since June 2021, about 35% warned that corporations are overinvesting, strategist Michael Hartnett wrote in a note. They’re also cutting their exposure to tech stocks.

A quarter of participants in the latest BofA survey saw an “AI bubble” as the top tail risk to markets, while 30% said capital expenditure on AI by the big tech companies was the most likely source of a credit crisis.

Hyperscalers such as Microsoft Corp., Meta Platforms Inc., Alphabet Inc. and Amazon.com Inc. still have positive outlooks despite massive investments in AI and concerns around cash flows, according to JPMorgan Chase & Co. strategists led by Dubravko Lakos-Bujas. They said AI-related capex is projected to grow by 53% over the next 12 months.

“The Street is increasingly more sensitive about what this rate of spending means for cash flow,” the strategists said. While cash flow is expected to turn negative for some companies, the bank’s analysts see spending coming from a “position of strength.”

“A few months ago, the market debated whether AI was real,” said Jean Boivin at BlackRock Investment Institute. “Today, it’s seen as an active threat to business models. We believe the hunt to sort the winners and losers reinforces AI’s massive buildout – and the borrowing spree by to finance it.”

Boivin says the market has been “laser-focused” on identifying companies exposed to AI disruption – and sorting out which ones it thinks will be able to evolve and adapt.

“We are still firmly in the AI buildout phase. The mega cap tech companies are spending heavily on chips, data centers and power infrastructure. This is a key reason why we still like infrastructure,” Boivin noted. “What has changed is the market’s focus: it now asks how AI adoption will translate into revenues and profits. This sorting of winners and losers means it’s prime time for active investing.”

Meantime, debt investors are worried that the biggest tech companies will keep borrowing until it hurts in the battle to develop the most powerful AI.

That fear is breathing new life into the market for credit derivatives, where banks, investors and others can protect themselves against borrowers larding on too much debt and becoming less able to pay their obligations. Credit derivatives tied to single companies didn’t exist on many high-grade Big Tech issuers a year ago, and are now some of the most actively traded US contracts in the market outside of the financial sector, according to Depository Trust & Clearing Corp.

The sky-high spending to build out the data centers for AI has brought consternation about how long the payback period will be, along with serious concerns regarding the availability of power supply to light them all up, said Navellier.

“While replacing workers with AI software solutions promises shrinking costs, at the same time, it brings questions about labor demand, leading to concerns regarding consumer spending,” he said.

‘Inseparable’

Macro conditions have momentarily taken a back seat to AI disruption, but the two are “inseparable” in the long term, according to Jason Draho at UBS Global Wealth Management. Thus, thinking about what AI means for terminal values at a macro level is just as important to evaluating the investment outlook.

“The debate over who will be the corporate beneficiaries and losers from AI shouldn’t obscure the potentially large macro implications,” he said. “Higher productivity, lower inflation, and labor market disruptions are all possible. While the terminal value for some companies may indeed be zero because of AI, the ‘terminal GDP’ for the entire US economy is likely to be a lot larger in a decade because of that same AI disruption than had it not occurred.”

In other words, the overall economic pie will be bigger, Draho noted.

“The critical question for asset allocation is how will that pie be divided across society, and asset classes,” he said. “Even if AI doesn’t end up being particularly disruptive for labor markets, capital (i.e., investors) are still likely to get many of the benefits. That big picture conjecture on the division of macro terminal values is important to keep in mind while wondering which sector might be impacted next.”

Corporate Highlights:

Apple Inc. is accelerating development of three new wearable devices as part of a shift toward artificial intelligence-powered hardware, a category also being pursued by OpenAI and Meta Platforms Inc. Anthropic PBC’s talks about extending a contract with the Pentagon are being held up over additional protections the artificial intelligence company wants to put on its Claude tool, a person familiar with the matter said. Palantir Technologies Inc. said it’s moved its headquarters to Miami from Denver at a time when more tech firms are flocking to South Florida where local officials are promoting the region as an alternative to Silicon Valley. Citigroup Inc. shares have room to run due to improving profitability at the bank, Morgan Stanley analysts said after the stock hit a 17-year high this month. Warner Bros Discovery Inc. has agreed to reopen negotiations with rival Hollywood studio Paramount Skydance Corp. after the suitor proposed raising its bid and sweetened other terms of its offer, setting the stage for a renewed showdown with Netflix Inc. UnitedHealth Group Inc.’s chairman and chief executive officer, Stephen Hemsley, has invested in health-care startups for years, creating the potential for conflicts of interest, according to The Wall Street Journal. The US Air Force said it intends to complete by the end of the year a restructuring plan for the new Sentinel intercontinental ballistic missile system from Northrop Grumman Corp., after the projected $141 billion program was plagued by skyrocketing costs and fielding delays. Home Depot Inc. is making the requirements for bonus payouts to managers more strict as the retailer confronts a business slowdown. Gemini Space Station Inc., the crypto exchange founded by Cameron and Tyler Winklevoss that went public just before Bitcoin’s plunge, said three top executives left the company in a sweeping leadership shakeup that followed a broad round of layoffs earlier this month. Michael Saylor’s Strategy Inc. bought nearly $170 million in Bitcoin, roughly half of which was financed with perpetual preferred stock, the highest proportion since November. AMC Entertainment Holdings Inc. is seeking nearly $2.5 billion from credit investors to refinance existing debt. General Mills Inc. lowered its fiscal 2026 sales outlook, citing a more challenging consumer environment. Genuine Parts Co. will split into two publicly traded companies following a review of options for its automotive and industrial business lines. Danaher Corp. agreed to buy Masimo Corp., in a deal with an enterprise value of about $9.9 billion, allowing it to gain a foothold in the medical supply business. Blackstone Inc. is in advanced talks to acquire residential services provider Champions Group for about $2.5 billion, according to people familiar with the matter. Tech enthusiasts’ craze for artificial intelligence program OpenClaw has sparked a blistering rally in shares of Raspberry Pi Holdings Plc, the company that makes one of the simplest forms of personal computers. Adani Group plans to invest $100 billion by 2035 to develop green-powered, AI-ready data centers as billionaire Gautam Adani seeks to capitalize on India’s bid to emerge as a hub for artificial intelligence and cloud computing. Bayer AG agreed to pay more than $7 billion as part of a settlement push to resolve current and future cancer lawsuits over its top-selling Roundup weedkiller, the company announced Tuesday. Emirates Chief Financial Officer Michael Doersam, one of the senior executives who helped transform the Dubai carrier into the world’s biggest international airline, will leave his job by the end of June. Some of the main moves in markets:

Stocks

The S&P 500 rose 0.4% as of 2:12 p.m. New York time The Nasdaq 100 rose 0.3% The Dow Jones Industrial Average rose 0.4% The MSCI World Index rose 0.3% Bloomberg Magnificent 7 Total Return Index rose 0.6% Philadelphia Stock Exchange Semiconductor Index rose 0.6% IShares Expanded Tech-Software Sector ETF fell 2.1% The Russell 2000 Index rose 0.4% S&P 500 Equal Weighted Index was little changed Currencies

The Bloomberg Dollar Spot Index was little changed The euro was unchanged at $1.1851 The British pound fell 0.5% to $1.3561 The Japanese yen was little changed at 153.35 per dollar Cryptocurrencies

Bitcoin fell 1.1% to $68,082.01 Ether rose 0.2% to $2,002.54 Bonds

The yield on 10-year Treasuries was little changed at 4.06% Germany’s 10-year yield declined two basis points to 2.74% Britain’s 10-year yield declined two basis points to 4.38% The yield on 2-year Treasuries advanced three basis points to 3.44% The yield on 30-year Treasuries was little changed at 4.69% Commodities

West Texas Intermediate crude fell 0.7% to $62.42 a barrel Spot gold fell 1.9% to $4,897.98 an ounce –With assistance from Chris Nagi.

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