Artificial intelligence was expected to be the most certain investment theme this year. However, it has transformed into a threat—not to the tech giants building AI, but to asset-light companies potentially displaced by AI.

This week, the S&P 500 approached its worst performance since November, only rebounding after Friday's mild inflation data. Meanwhile, fears of AI-driven disruption are spreading across multiple market segments.

White-collar industries such as software firms, wealth managers, brokers, and tax advisors—which saw profit margin expansion over the past decade—are being repriced within weeks. The shockwave has even reached the private credit market that lends to these companies.

This week, U.S. utilities outperformed as a safe haven from AI disruption, while financials became the worst-performing sector.

Highly confident bets on Wall Street have unraveled in just six weeks. Fund managers who began the year with record-low cash allocations and minimal hedging are now witnessing the collapse of consensus trades, as favored assets underperform neglected ones.

Energy, consumer staples, and U.S. Treasuries are leading 2026 market gains, while popular AI bets at the start of the year are faltering. The iShares 20+ Year Treasury Bond ETF (TLT) recorded its largest weekly gain since April, while the SPDR S&P 500 ETF Trust (SPY) has lagged TLT by 2 percentage points since December—its worst start to a year in a decade.

**From "Sure Bet" to "Disruption" Threat**

The AI investment theme, initially seen as a clear opportunity, has become the market's biggest source of uncertainty.

Investors are questioning the timeline for returns on massive capital expenditures by tech giants and whether remaining cash can continue supporting stock buybacks. Adam Crisafulli, co-founder of Vital Knowledge, noted:

Over the past few months, AI has hurt more stocks than it has helped.

Jim Caron, Chief Investment Officer at Morgan Stanley, previously stated in a media interview:

We are witnessing a repricing in one market segment—software. There is concern this could trigger contagion spreading to other areas.

He is monitoring two issues: whether AI-induced losses will cause contagion, and how to hedge this risk through diversification.

**Extreme Positioning Amplifies Market Volatility**

Two forces are intensifying volatility in U.S. equities.

First, positioning. A January Bank of America investor survey showed cash allocations fell to a record low of 3.2%, with nearly half of fund managers holding no downside protection—the lowest level since 2018.

Second, leverage networks link seemingly unrelated portfolios, where liquidations in one area trigger sell-offs in another. James Athey, portfolio manager at Marlborough Asset Management, commented:

The biggest risk here is an additional volatility shock event. Everything appears highly correlated, so selling in one asset could force selling in others.

On Thursday, broad U.S. stock declines triggered algorithmic selling in metals, forcing some investors to exit commodity positions, including metals, for liquidity. Gold fell over 3%, dropping below $5,000, while silver plunged 11%.

A model designed by Jordi Visser of 22V Research shows that market interconnectedness is surging, even as the VIX remains low and the S&P 500 holds above its 50-day moving average. This combination suggests stress lies beneath a calm surface.

Over the past two years, such stress signals appeared about once a month. This year, they have occurred more than a dozen times in under two months.

The VIX briefly broke above the closely watched 20 level this week. Although readings show no panic, the skew of put options remains near historic highs, indicating the market is systematically buying downside protection.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) recorded its best week relative to the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) since October, extending its year-to-date lead. The 10-year U.S. Treasury yield ended the week at a two-month low.

**Investors Adjust Strategies**

So far, sharp volatility has not turned into a sustained market crash.

The S&P 500 remains near all-time highs, and credit spreads hover near decade lows. However, hedging activity is increasing, as seen in trading volumes of individual stock put and call options.

The CBOE put-call ratio has surged since January, rebounding from a near four-year low.

ETFs tracking companies with high shareholder returns attracted $3.6 billion in new inflows this month—the largest among so-called smart beta funds tracked by Bloomberg.

Analysts suggest U.S. stocks could regain upward momentum if negative AI disruption news pauses and volatility declines, leading to more supportive hedging flows. However, as Goldman Sachs' Chris Hussey noted:

There is a conflict between the market consensus that AI will disrupt broad economic sectors and macro data and corporate performance showing no abnormalities. Will collective consensus prevail, or will the post-pandemic theme of sustained economic resilience continue, with U.S. growth and corporate earnings remaining robust? The answer may take considerable time to determine.