U.S. stocks staged a strong rally last Friday, with the Dow Jones Industrial Average surging over 1,200 points to breach the 50,000 mark for the first time. However, instead of calming market sentiment, the rebound intensified concerns about future volatility. Persistent doubts surrounding the disruptive impact of artificial intelligence and the return on massive AI investments have left market vulnerabilities exposed.
Asian equities rose sharply on Monday, extending the roughly 2% rebound seen on Wall Street the previous Friday. The S&P 500 recovered most of its earlier losses, ending the week nearly flat. In prior sessions, a selloff in software stocks had spread to tech giants, private credit markets, and even corporate bonds. Investors fear that AI-driven disruption may be broader than anticipated, and companies planning to invest hundreds of billions in AI infrastructure may struggle to meet lofty profit expectations.
Yet conflicting signals within the rally highlighted underlying anxiety. Despite the broad market surge, Amazon shares fell 5.6%, erasing approximately $133 billion in market value, after the company announced plans to spend $200 billion on AI-related projects this year. Alphabet shares also declined 2.5%. The four largest hyperscale cloud providers are projected to spend a combined $650 billion this year.
The turbulence has prompted investors to reassess their portfolio allocations. Some institutions plan to reduce exposure to technology stocks and increase holdings in industrial and materials sectors. Weak economic data has further deepened unease, with investors bracing for more volatility.
The recent market turmoil originated from fears that AI could disrupt the software industry. “AI does seem pretty intelligent when it comes to programming,” said David Kelly, Chief Global Strategist at J.P. Morgan Asset Management. “Companies won’t abandon deeply embedded software overnight. But as a long-term challenge, AI looks like a legitimate threat to the software sector.”
According to Jefferies analysts, hedge funds have been reducing exposure to software stocks for some time. At its peak, the selling was described as “extreme” and “completely price-insensitive.”
The ripple effects of the selloff have left nervous investors scrambling to identify the next potential casualty. Clark Bellin, Chief Investment Officer at Bellwether Wealth in Nebraska, said his firm plans to cut tech exposure and reallocate those funds to industrial and materials companies. “It makes you wonder which other areas are almost purely driven by speculation,” Bellin noted.
For some, last week’s sharp swings reignited long-standing worries about the dominance of AI in both the stock market and the broader economy. Investors have long been concerned that stunning gains in AI-related stocks have made the market overly reliant on a handful of tech giants, while massive AI spending by some of the world’s largest companies may be masking broader economic weakness.
Recent economic data has offered little reassurance. According to the Labor Department’s monthly report, U.S. job openings fell by nearly one million last year. ADP estimated that private sector hiring added only 22,000 jobs in January, less than half of what analysts surveyed by The Wall Street Journal had expected. The delayed release of January’s employment report, due to a brief government shutdown, has further clouded the economic outlook.
“The economic data has been quite soft,” Kelly remarked. “We have a C- economy supporting an A+ stock market, and I think that’s part of the problem.”
This week, investors will receive the delayed January jobs report and the latest inflation figures, which may influence interest rate policy and market direction in the coming months. Lower rates would be welcome news for tech investors still recovering from last week’s selloff.
As money rotates out of tech, there are signs of inflows into other sectors. Consumer staples were the best-performing group in the S&P 500 last week. Investors often view the sector as defensive, since people continue buying essential goods even during an economic slowdown.
The Russell 2000 small-cap index climbed 3.6% on Friday. Still, some investors have recently placed large bets that this relief may be short-lived. Data from Cboe Global Markets showed that the skew for options on the iShares Russell 2000 ETF reached its highest level since November earlier this week. A higher skew typically indicates that put options—often used to hedge against declines—are becoming more expensive relative to call options, which represent bullish bets.
Despite the uncertainty, some investors believe strong corporate earnings will help drive the market higher. S&P 500 companies are projected to grow profits by 14% in 2026, according to FactSet data. “The bull market remains intact,” said Angelo Kourkafas, Senior Global Investment Strategist at Edward Jones. “We would view any pullback as an opportunity to re-engage.”
But even if Friday’s rebound suggests investors viewed the selloff as overdone, few deny that the long-term outlook for software firms—and others in the path of AI advancement—has grown more uncertain. Many still expect the volatile trends seen in early 2026 to persist.
“I don’t want to paint this as apocalyptic, but I do think volatility will stick around for a while,” Bellin concluded.