Stock Market: AI Anxiety, Sector Rotation, and Staying Calm in Volatility
- HFF Staff Writer
- 1 hour ago
- 5 min read
Volatility returned in a very modern way this week: markets weren’t just reacting to rates or inflation.
They were repricing two big AI-related questions at the same time:
How expensive will the AI buildout get?
Who gets disrupted by AI—especially inside software and data services?
The result was a sharp shakeout in parts of technology (especially software), while other areas of the market quietly held up better—classic “rotation” behavior under the surface.
The week in one minute
Here are the themes that mattered most for investors:
Global shares were on track for their worst week since November, down roughly 1.6%.
The S&P 500 was down about 2% for the week, dragged by technology’s heavy weight in the index.
Software and services experienced the sharpest pullback, with some measures showing the group on pace for its worst weekly decline since March 2020 and down meaningfully over a little more than a week.
The market’s “fear gauge” (VIX) hovered around the 20 level—elevated, but not panic.
Earnings season remained constructive overall, with a strong percentage of companies beating estimates.
What actually drove the selloff
This week didn’t feel random. It was a repricing of expectations.
1) The market pushed back on “capex without payoff”
Investors reacted to another round of very large AI infrastructure spending plans from mega-cap tech. The message from markets was straightforward: spend big if you must, but show a credible path to monetization.
In particular, some commentary around increased AI-related capital spending raised concerns that near-term free cash flow and margins could face pressure, even if longer-term benefits remain possible.
2) AI disruption fears hit software—hard
At the same time, investors wrestled with the idea that advanced AI tools may commoditize or pressure pricing power in parts of software and data services. That created a fast shift in sentiment for companies perceived as vulnerable to AI-driven substitution.
3) Rotation showed up under the surface
One underappreciated point: while tech struggled, other parts of the market held up better. That’s what rotation looks like—headline indexes can feel heavy even while many stocks are doing “fine.”
Where we saw stress—and where we didn’t
A helpful way to stay rational during a volatile week is to separate “loud” from “systemic.”
The “loud” parts
High-growth and software names: sharp drawdowns and rapid sentiment shifts.
Speculative risk assets: larger swings as investors reduced exposure to crowded trades.
The “systemic” parts that didn’t look like a crisis
We did not see the hallmarks of a full-blown financial crisis in the way true market stress typically shows up. This week’s primary story was risk repricing concentrated in specific segments—particularly software and AI-adjacent names—alongside rotation elsewhere.
A calm investor’s translation of this week
If you felt whiplash, you’re not alone. But here’s the clean interpretation:
Markets don’t move on facts alone; they move on changes in expectations.
This week, expectations shifted toward:
“AI spending is huge… but will it pay off soon enough?”
“AI helps some software companies… but it could undermine others.”
That’s not the same as “the economy is collapsing.” It’s closer to:The winners might be changing, and the price you pay for growth just went up.
How to remain calm during volatility
Here’s a practical playbook to follow when headlines feel urgent.
1) Anchor to your timeline (not this week’s chart)
Ask: When do I actually need this money?
Next 0–3 years: volatility matters more; cash planning matters more.
5–30 years: weekly volatility is normal noise, even when it’s uncomfortable.
2) Separate “portfolio” from “plan”
A portfolio moves every day. A plan should only change when your goals, cash-flow needs, tax situation, or risk capacity changes.
3) Use rules, not feelings
If you rebalance, do it because you have a policy, such as:
Rebalance when allocations drift by a certain percentage, or
Rebalance on a set schedule (quarterly or semi-annually)
Rules reduce the odds you sell after declines and buy after rallies.
4) Control the media input
During a volatile week, the brain treats headlines like survival signals. That can trigger poor “fight or flight” decisions.
Try:
Check markets once per day (or once per week)
Read analysis after the close, not during intraday swings
5) Remember what diversification is for
Diversification isn’t designed to make every day feel good. It’s designed so that one theme breaking doesn’t break your entire financial future.
6) Replace “do something” with “do the right small thing”
If you feel the urge to act, choose a lever that improves outcomes without requiring predictions:
Increase emergency reserves
Pay down high-interest debt
Raise retirement contributions by 1%
Review insurance coverage
Confirm beneficiary designations
Consider tax-smart strategies where appropriate
What we wouldn't do right now
Avoid the most common volatility mistakes:
Don’t sell long-term holdings just to “stop the stress.”
Don’t chase whatever worked this week; rotation can reverse fast.
Don’t confuse volatility with permanent loss.
Don’t overhaul your strategy based on a single theme.
What we’re watching next week
The market’s focus can pivot quickly from AI narratives back to economic data and interest-rate expectations.
Items to watch:
January nonfarm payrolls
January CPI
Continued earnings reports and guidance, especially from market leaders
Bottom line
This week was a reminder that markets can reprice narratives quickly—especially when valuations are high and expectations are even higher. But volatility is not a signal to abandon a well-built plan. It’s a signal to use the plan.
If the last few days made you uneasy, the right next step is often simple: review your time horizon, check your allocations, confirm your cash reserves—then let the strategy do its work.
FAQ: quick answers for a volatile week
“Is the AI trade over?”
Not necessarily. A week like this can be a shakeout and repricing, not an obituary. Investors are demanding clearer economics for AI investment and getting more selective about winners vs. losers.
“Should I move to cash until things calm down?”
For long-term goals, going to cash is often a bet that you can time both the exit and the re-entry. Most investors can’t do that consistently. A rules-based allocation and rebalancing process is typically a calmer approach.
“Why did the S&P 500 fall if many companies beat earnings?”
Index performance can be dominated by heavily weighted sectors. When a large segment like tech struggles, it can pull the index down even if many other stocks are holding up.
Disclosure
This commentary is provided for general informational purposes only and should not be construed as individualized investment advice or a solicitation to buy or sell any security. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. Opinions are as of the publication date and are subject to change. Please consult a qualified professional regarding your specific situation.