Monday's AI Panic Created Excellent Stock Picking Opportunities on Tuesday
The emotional sell-off cleared the air for now, but the hard work continues.
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Monday's AI-driven selloff was an emotional capitulation that created opportunity for cooler heads that were not sucked into unjustified panic. When trading becomes that irrational, it acts as a clearing mechanism, and the mis-pricing it creates is where patient investors make their money.
The indices improved steadily throughout the session, and breadth was solid with about 67% of stocks finishing with gains. There were approximately 240 new 12-month highs versus 250 new 12-month lows. On a day when the narrative was supposed to be market-wide AI destruction, that ratio is nearly even. This isn't a market in free fall. It's a market rotating. Many stocks unrelated to AI held up through Monday's carnage and resisted the pull of the AI gloom entirely. Money is moving and not heading for the safety of the sidelines.
The Russell 2000 led, but it was very broad action. Chip stocks helped the Nasdaq 100, and Apple (AAPL) provided a boost after announcing it will bring Mac mini production to the United States for the first time and expand advanced AI server manufacturing in Houston.
The financial sector started poorly but improved as the day progressed. There was more news about AI developments in the sector, but that didn't gain any traction.
The Consumer Confidence Head Fake
The February Consumer Confidence number came in at 91.2, above the consensus of 86.0 and the prior reading of 84.5. The headline beat helped sentiment, but there is still some real worry out there, and it is reflected in spending.
Goldman Sachs made the point in a note on Tuesday that a stock market correction is the biggest near-term economic risk due to its impact on spending. Goldman expects 2.5% GDP growth in 2026 but calculates that a 10% market drop could shave half a point off that number and a 20% drop could cut nearly a full point. The problem is the wealth effect of the stock market. High income households hold most stocks and drive consumer spending. A correction turns that tailwind into a headwind. There is much talk about the K-shaped economy where lower earners are already struggling and a market selloff could hurt the upper half next.
What Comes Next
The State of the Union Address will be given on Tuesday night. Bret Baier is reporting that President Trump will call for new corporate and personal tax cuts in the speech. From Trump's lunch with anchors today: "The country will see the best three years on the economy in the nation's history. And it's already started."
Investors will be listening closely for specifics on tariffs, trade deals, affordability and Iran and probably won't be swayed by Trump's celebration and claim that this is the greatest economy in the history of the world. The consumer confidence internals we saw today suggest that not everyone got the memo.
Wednesday night is Nvidia (NVDA) earnings and that is likely the most important event of the week. The market has been almost entirely focused on the economic disruption caused by AI. What it has underestimated is whether the hyperscalers are actually earning a decent return on their massive infrastructure investments. Capital spending on AI has been a major driver of economic growth in data centers, power infrastructure, chips, and manufacturing.
There is real economic activity generating real returns, and it continues to expand, not contract. If Jensen Huang delivers Wednesday night and confirms that the spending is producing results, the entire AI destruction narrative quickly becomes complicated. You can't have AI destroying everything while simultaneously generating massive ROI for the companies that build it. One of those stories has to shift and that has major market implications.
Game Plan
Tuesday was constructive but don't get overconfident. Technical conditions are still problematic and there is no sustained momentum yet. It is a major positive that we are seeing some technical support and oversold bounces but V-shaped recoveries don't tend to occur like they did when AI was the market leader.
The right approach here is patience with selective aggression. The new highs and new lows data today tells you the market is rotating, not collapsing. There are stocks working right now that have nothing to do with the AI fear trade. Size positions correctly and let the big macro events play out before you press too hard.
If Nvidia delivers Wednesday night the whole market narrative could shift but a sell the news reaction is a major risk.
Have a good evening. I'll see you tomorrow.
At the time of publication, DePorre was long NVDA.
