Stock Market Sees an Ugly End to the Week as AI Confusion Reigns
The market is struggling to process a major economic revolution, unlike anything seen before.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
It was an ugly end to an ugly week. The S&P 500 dropped about 0.5% on Friday, and the Dow fell more than 550 points as selling pressure that began with Nvidia's (NVDA) post-earnings reaction carried through to the close. The Nasdaq gave up another 1.1% as AI-related names continued to struggle.
For the week, the S&P 500 lost roughly 1%, and the Nasdaq fared considerably worse, weighed down by the ongoing rotation out of technology. The Russell 2000 was close to flat for the week, but none of the indices reflected how difficult this week was for most stocks. There was some strong rotational action but it was very choppy and inconsistent. At the close on Friday, there were 230 new 12-month highs to 175 new lows, hardly bear-market action, but it does illustrate how much stocks are jumping around within a very wide trading range.
Adding to the pressure Friday morning was January PPI data that came in hotter than expected. Headline PPI rose 0.5% against expectations of 0.3%. More concerning was core PPI, which excludes food and energy, jumping 0.8% against an expectation of 0.3%.
That tells us inflationary pressures remain, including on the services side, and it gives more ammunition to the hawks on the Fed. Even members sitting on the fence will likely feel pressure to wait longer before cutting rates again. It was not what a market already dealing with AI uncertainty needed to hear on a Friday afternoon.
More Than a Wrecking Ball
All week I have been writing about the AI wrecking ball and the way it has been hitting different stocks and sectors in sequence. But that framing, while useful, actually understates what is happening. The development of AI is not just a disruptive force for certain industries. It is one of the most significant developments in economic history.
We have seen transformative moments before. The Industrial Revolution restructured how goods were made and who made them. The internet changed how information moved and how commerce worked. But what is different about AI is the speed at which it is arriving. There were decades to adjust to the Industrial Revolution. There were years to adjust to the internet. With AI there are significant new developments on nearly a daily basis and the pace is not slowing. It is accelerating.
This is why investors are struggling. It is not a failure of analysis or a lack of information. It is that the human mind, and the market mechanisms built around human decision making, were not designed to process change at this velocity. We are still in the very early stages and anyone who tells you they know exactly what the future holds is not being straight with you.
Destruction Gets Headlines, Opportunity Doesn't
It is notable that the great earnings report from the leader of AI infrastructure, Nvidia, was the catalyst for such a negative emotional reaction. The market was already focused on problems in software and other groups and great numbers for Nvidia seems to have accelerated the focus on the destruction side of this equation: which companies are being disrupted, which business models are vulnerable, which stocks need to be sold. That is understandable given the news flow, but it misses half the picture.
AI is also creating tremendous opportunities. The productivity gains that many companies will enjoy as they integrate these tools into their operations are substantial and in most cases still not reflected in valuations. Companies that use AI to do more with less, to cut costs, accelerate product development or serve customers more effectively, will see it show up in their earnings over time. Block, Inc (XYZ) which jumped 17% after announcing that it was replacing 40% of its workforce with AI, is a good example of the potential upside. The market will eventually price in the positives of AI, but right now it is too busy worrying about the destruction to pay much attention to the creation.
I'll admit that I am biased here. I have always preferred picking individual stocks and trading them over trying to guess the direction of the indices. In most environments, that preference is a matter of style. In this environment, it will be a necessity. The indices are going to remain noisy and difficult to read as long as this transition is playing out. But within that noise there are companies whose specific situations make them genuinely compelling, either because they are benefiting directly from AI productivity or because they are being unfairly caught in the crossfire.
Finding those stocks and understanding why they are worth owning is the work in front of us. It is also the most interesting kind of market to navigate if you are willing to put in the effort.
Have a good weekend. I'll see you Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
