Extremely Difficult Week for Stocks Ends With Dow Jones All-Time High
Investors are rerating the entire AI industry and it is a painful process.
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The DJIA finished on Friday at a new all-time high, crossing the 50,000 level for the first time in history. That is a very impressive round number and suggests that we are in the thrall of a rip-snorting bull market.
Unfortunately, the Dow is a flawed index and does not do a very good job of indicating what is really going on in the broader market. Despite the new high for the media’s favorite index, there was some dramatic selling and corrective action in AI, software, Magnificent Seven (MAGS) names, high PE stocks, semiconductors and growth names.
The Magnificent Seven lost nearly 5% and the Nasdaq 100 (QQQ) around 2.7%, but many leading names like Amazon (AMZN) , Microsoft (MSFT) , AMD (AMD) , Qualcomm (QCOM) and Palantir (PLTR) lost far more.
The Russell 2000 (IWM) , which is the home of many high-beta, small-cap stocks, actually finished the week up about 1.7% after a massive rip higher of 3.2% on Friday. That is a pretty impressive move and hardly qualifies as a "correction."
What is going on here is rotational action. Investors are reacting to some major shifts in the AI group that are having a profound impact. There are two major trends occurring:
1. The “Anthropic Effect.” Market sentiment for the software sector took a hard hit when AI hyperscaler Anthropic released a new suite of automation tools, including Claude Opus 4.6 and Claude Cowork. These tools sparked fears that existing software companies could see their core businesses disrupted by "AI agents," prompting a sharp rotation out of names such as Adobe (ADBE) , Intuit (INTU) and Salesforce (CRM) .
2. CapEx Panic. The theme of the week was "show me the ROI." Alphabet (GOOGL) and Amazon both indicated significant increases in infrastructure spending, with Amazon projecting $200 billion in 2026. While management is confident these investments are necessary and will pay off, investors are skeptical of the significant increase in spending, especially after Microsoft indicated that its return on software tools was not as favorable as expected.
Earnings from the Magnificent Seven stocks were a disaster for the market this quarter and triggered major rethinking of how AI will develop in the future. Investors are still trying to sort it all out, but the one thing that is clear is that there will be some big winners and many losers. One odd reaction this week was pressure on companies that benefit from the massive capital spending, but many did bounce back to some degree on Friday.
Now that most of the big technology reports are out of the way, investors can catch their breath and sift through the wreckage. Watch for a shift back to individual stock picking as investors look for stocks that were unfairly punished by the panic selling in software and growth names. Many stocks that have not changed fundamentally were hit hard simply because they are in an index or are thinly traded.
The strong recovery on Friday was a good sign that investors believe the selling this week was an overreaction. There is now a realization that AI is not a magic solution for every company, but it will remain a powerful growth engine for the overall economy and select stocks.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre was long GOOGL.
