AI Market Disruption

AI Related Investments In The Spotlight

Much of the focus in the S&P 500 last week was on earnings. More specifically, the earnings of AI-related stocks.

Google and Amazon earnings were optically strong, and while there is little concern that they will continue to deliver on earnings, questions about the long-term sustainability of AI-related investment are gaining momentum.

Capital expenditure related to data centre build-outs has drawn particular attention.

The capital expenditure involved in the data centre infrastructure build-out is turning once-free-cash-flow large-cap tech companies into capital-intensive businesses.

That will likely limit the buyback opportunities often associated with large-cap tech companies.

Both Google and Amazon saw their stock prices fall after the earnings announcement and mirrored the post-earnings performance of most AI-related stocks.

AI Automation Tools

To add to the mix, Anthropic’s release of new AI automation tools sparked a sell-off in software-as-a-service businesses.

The Anthropic release signalled an acceleration in productivity tools and disruption to both existing non-tech business models and new AI models.

While that does raise short-term questions about what it means for markets and knowledge workers, it also raises fresh questions about which industries AI could disrupt next.

Not surprisingly, markets were down sharply at the close on Thursday, pushing below previous support at 6800.

However, the narrative and market direction flipped on Friday.

From a technical analysis perspective, there were no obvious reversal signals and, additionally, no earnings announcement after the close on Thursday that explains the reversal.

It was almost as if the “Plunge Protection Team” was activated in response to Trump’s “Stop selling the market” post.

S&P 500 Key Levels

Expect the market to consolidate today.

From an options perspective, the 7000 level remains a strong call wall, and the first major put level is sitting at 6900.

Year-to-date, energy, consumer staples and utilities are outperforming the S&P 500. However, technology, communication services and financials are underperforming.

So everything that you would expect to see in a normal late cycle is in play.

We remain cautious. The structure of the markets and charts hasn’t changed, and our view is that institutions haven’t finished selling into retail.

Of note last week was that the top 200 insider trades were all short trades.

The balance of probability suggests a correction in the first quarter or early second quarter.

The only thing retail investors control is the risk they take.

Take time to pre-determine the risk because the difference between institutions and retail is that institutions know how to lose and still have money left to be right with.