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Artificial intelligence-driven turbulence in the technology sector is expected to keep stock investors on high alert in the coming week, while a wave of critical economic data could shift attention to broader market health. The AI-fueled tech selloff intensified this week as concerns mounted about how artificial intelligence will reshape business models across the software industry, according to market observers.
A sharp downturn among software stocks dominated Wall Street throughout the week, with the sector’s heavy weighting in major U.S. equity indexes dragging down overall market performance. However, stocks rebounded strongly on Friday, with the Dow Jones Industrial Average crossing the historic 50,000 milestone for the first time, driven by a surge in semiconductor company shares.
Market Rotation Emerges Amid AI-Driven Tech Selloff
Beneath the surface volatility, investors have found encouragement in a notable rotation away from technology toward sectors that lagged during most of the three-year bull market. Energy, consumer staples, and industrials have outperformed significantly this year, even as the tech sector has struggled with mounting pressures from the AI transformation.
Angelo Kourkafas, senior global investment strategist at Edward Jones, noted that rotation has become the dominant theme this year. He explained that old-economy sectors are receiving renewed investor interest, while the expectations bar for technology companies appears so elevated that profits-taking has become investors’ natural response regardless of reported results.
Software Sector Faces Intensifying Pressure
The technology sector has declined 9 percent since peaking in late October, with software stocks bearing the brunt of selling pressure. The S&P 500 software and services index plummeted 15 percent in just over a week, amplified by disappointing earnings reports including results from software giant Microsoft, according to market data.
Meanwhile, most of the other eleven S&P 500 sectors have posted gains during this period, with four sectors recording double-digit percentage increases. The stark divergence highlights how investors are increasingly attempting to identify winners and losers in the evolving AI landscape.
Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, observed that sentiment has shifted from AI lifting all companies to concerns that rapid technological acceleration could limit growth rates for certain businesses. This represents a fundamental change in how markets are evaluating AI’s impact across different industries.
Tech Weight Creates Index Vulnerability
Despite gains in most sectors, the benchmark S&P 500 has managed only a slim increase since late October. With technology still accounting for approximately one-third of the S&P 500’s weight, investors fear the index will face sustained pressure if the tech selloff continues, according to analysts.
Jim Reid, head of macro and thematic research at Deutsche Bank, warned that while markets can absorb prolonged sector rotation without obvious stress initially, the deeper and longer a dominant sector sells off, the harder it becomes for broader indexes to withstand the drag. Additionally, the coming week will feature software industry earnings reports from AppLovin and Datadog, along with results from high-profile companies including Coca-Cola, Cisco Systems, and McDonald’s.
Critical Economic Data Awaits
Investors will closely monitor monthly employment and consumer price reports, both delayed slightly due to the recent three-day government shutdown. January’s nonfarm payrolls report, scheduled for Wednesday, is expected to show an increase of 70,000 jobs, according to a Reuters poll.
In contrast, the January consumer price index due Friday will provide fresh insight into inflation trends that the Federal Reserve has characterized as “somewhat elevated.” A survey released Thursday showed layoffs announced by U.S. employers surged in January, raising questions about labor market stabilization that the Fed cited when holding interest rates steady last month.
Markets currently expect the Federal Reserve to delay further interest rate cuts until its June meeting, with Fed fund futures pricing in approximately two additional quarter-percentage-point cuts by December. These expectations have remained relatively stable following President Donald Trump’s nomination of Kevin Warsh as Fed chair, though upcoming economic data could alter the anticipated timeline for monetary policy adjustments.
