MW How the riptide around AI and stocks could seep into Fed decisions and the housing market

By Joy Wiltermuth

AI is suddenly driving big swings in stocks. It also could seep into central-bank policy decisions and the U.S. housing market.

AI is driving big swings in stocks, but it also could become a driver of central-bank policy decisions and hit the U.S. housing market.

Investors felt a slight reprieve on Friday from the riptide that's been gathering around artificial intelligence and the stock market.

Software stocks bounced after two big days of drawdowns and as an inflation report for January showed consumer prices rose less than expected. Focus also shifted back to parts of the market that could benefit from additional interest-rate cuts this year and an economic uptick.

"It's nice to see some green on the screen before the weekend," said Angelo Kourkafas, senior global strategist at Edward Jones. "There's been some pretty indiscriminate selling." But at least on Friday there seemed to be more of a realization that "not all of this business will go away," he added.

The iShares Expanded Tech-Software Sector ETF IGV rose 2.2% Friday, while the iShares Bitcoin Trust ETF IBIT gained 5.2%, according to FactSet. Both still were down more than 20% on the year, pointing to the damage already done to frothier and more speculative corners of the market.

The Russell 2000 index RUT of small-cap stocks saw a big 1.2% boost on Friday, while ending the week with a 0.9% loss. It was still up 6.6% on the year, according to FactSet. Optimism around the economy and a broader rally beyond tech has helped small-cap stocks outperform their large-cap counterparts.

The Dow Jones Industrial Average DJIA of mostly "old economy" industries was up 0.1% Friday and 3% higher on the year, helped by a view that its might be better insulated from AI disruptions than tech-centric stock indexes.

The S&P 500 SPX and the Nasdaq Composite COMP ended Friday mixed and 0.1% and 3% lower, respectively, in 2026.

"Before, there was no alternative to find growth other than tech," Kourkafas said. "As we see a broadening out in earnings growth over the next couple of quarters," the hope is the gap between tech and everything else narrows, he noted.

For now, however, investors may want to brace for months without additional rate cuts from the Federal Reserve. With January's jobs report surprising to the upside, the odds favor a pause in cuts until after Chair Jerome Powell's term ends in May.

That kind of wait might give investors pause about the strength expected to come from other areas of the market, given that the information-technology, communication-services and healthcare sectors have been supplying the bulk of the S&P 500's revenue growth.

Overall revenue growth in the index was pegged at 9% for the fourth quarter as of Friday, but it was 20.6% for tech, 12.3% for communication services and 10.3% for healthcare, according John Butters, senior earnings analyst at FactSet.

"Markets can gyrate and change their opinions regularly, erratically, and are often quite wrong," said Rick Rieder, BlackRock's chief investment officer of global fixed income, in emailed comments Friday. "Yet what we see playing out in corporate development and technology-related circles is something very distinctly different than anything we have seen in such rapid fashion in the past."

AI jitters might be hitting tech, software, financial companies and other stock sectors now, but some strategist think they also could soon start factoring into decisions at the central bank when it comes to inflation and the jobs market.

With that in mind, there's also potential for AI to negatively impact the U.S. housing market, where recent cracks have been forming.

Mortgage loans have been performing well in recent years, given the massive refinancing boom during the pandemic. That's because many borrowers were able to take out low, 2.5% to 3.5% 30-year fixed-rate mortgages, while at the same time there has been very significant home-price appreciation, said Mike Taiano, a senior analyst for financial institutions at Moody's Ratings.

Yet for people who bought homes in the past three years, paying much higher prices and steeper mortgage rates, delinquencies have been picking up, Taiano noted. There's been added pressure in parts of Florida and Texas, where home prices skyrocketed in recent years but lately have started to see declines.

"I wouldn't say it's gotten to a point of alarming," Taiano said. "But obviously it's something to keep an eye on as we move into 2026."

Another thing to monitor will be if more companies get comfortable with AI and it leads to layoffs, he added. "That's the thing you kind of have to watch."

Related: The great 'shrinkflation' of housing in America: What $500,000 buys today vs. what it bought in 2019

-Joy Wiltermuth

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February 14, 2026 07:30 ET (12:30 GMT)

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