U.S. stock markets staged a significant turnaround overnight. Early in the session, the three major indices experienced a broad sell-off, with the Nasdaq Composite falling over 1% at one point, before collectively rebounding into positive territory. Large-cap technology stocks showed mixed performance, with Apple surging more than 3%. In a recent report, Goldman Sachs noted that despite market concerns about the disruptive impact of artificial intelligence (AI), Wall Street analysts continue to raise earnings expectations for the software sector, alleviating worries about AI's effects.
Simultaneously, the latest remarks from Federal Reserve officials drew significant market attention. In the early hours of February 18 Beijing time, San Francisco Fed President Mary Daly stated that the Fed has approximately 75 basis points of room for interest rate cuts before reaching the neutral rate. Fed Governor Michael Barr indicated that the economic outlook suggests the Fed will keep interest rates unchanged for some time. Chicago Fed President Austan Goolsbee added that if inflation continues to decline, the Fed still has room for multiple rate cuts in the future.
On February 17 U.S. Eastern time, U.S. stocks executed a major reversal. The Dow Jones Industrial Average initially fell over 300 points, and the Nasdaq dropped more than 1.2%, before staging a broad recovery into positive territory. At the close, the Dow was up 0.04%, the Nasdaq gained 0.14%, and the S&P 500 rose 0.1%. Large-cap tech stocks were mixed: Apple jumped over 3%, Broadcom advanced more than 2%, Nvidia and Amazon each rose over 1%, while Google and Microsoft fell over 1%. ADRs of Taiwan Semiconductor and Meta closed slightly lower.
Strategists at Goldman Sachs recently stated that despite recent market anxiety about AI's disruptive potential, Wall Street analysts are still raising earnings expectations for software stocks. A research team led by Goldman strategist Ben Snider wrote in a report that over the past three months, two-year forward earnings expectations for software stocks have increased by 5%. They noted that industries considered most threatened by AI have seen positive upward revisions to their 2026 earnings per share forecasts and also reported double-digit growth in earnings for the past fourth quarter.
Snider said, "Despite investor concerns about AI disruption in recent weeks, software stocks at the heart of these worries generally reported earnings that beat consensus expectations, prompting analysts to raise their forecasts." He added that analysts now expect capital expenditure from so-called hyperscalers to be 22% higher by 2026 than projections at the start of this earnings season, noting this would exceed the investment intensity of the late 1990s. However, Snider cautioned, "Despite strong near-term performance, investors continue to debate the risk of AI causing long-term earnings disruption." Prior to this, Wedbush analyst and tech bull Dan Ives also stated that recent investor pessimism towards software companies is an "irrational prediction," arguing that genuine AI use cases and business models are actually emerging in the software sector.
On February 17 U.S. Eastern time, Governor Barr stated that interest rates should remain unchanged "for some time" until more evidence emerges showing inflation is moving sustainably toward the 2% target. According to a speech transcript published on the Fed's website, Barr believes that, based on the current situation and available data, maintaining stable interest rates for a period is likely appropriate while the Fed assesses incoming data, changes in the economic outlook, and the balance of risks. Recent data shows some stabilization in the U.S. labor market and inflation coming in below expectations, though it remains above 2%.
Barr pointed out that last year's rebound in goods inflation slowed the central bank's progress toward its price stability goal, increasing the risk of persistent high inflation, and therefore policymakers need to "remain vigilant." He said, "Before considering further policy rate cuts, I would want to see a sustained, steady decline in goods price inflation, provided labor market conditions remain stable." Barr also noted that the employment situation is stabilizing but warned the labor market is in a "delicate balance," with hiring near zero, making it more vulnerable to shocks. He added that AI could have a "transformative impact" on the economy, reshaping labor demand. If productivity increases significantly, it could also push up the so-called neutral rate. In the short term, AI could "deeply disrupt" the labor market, impacting some workers and forcing many to retrain or transition.
On the same day, President Daly stated that the Fed has about 75 basis points of room for cuts before reaching the neutral rate; inflation needs to be reduced; and aside from healthcare and education, most sectors of the U.S. economy are experiencing job losses, necessitating efforts to ensure labor market vulnerabilities do not turn into substantial weakness. Prior to this, President Goolsbee said that if inflation continues to decline toward the central bank's 2% target, there is potential for more rate cuts this year. Services inflation remains high, but if tariff-related price increases are one-off, policymakers have room to act. He stated, "I do believe that if this proves temporary and we can show we are on the path back to 2% inflation, there should be room for a few more rate cuts in 2026. I would like to see some evidence that we are moving toward 2%, at which point I believe rates can begin to decline sustainably."