Wall Street Week Ahead: Tech stock shakeout clouds market ahead of economic data deluge

An artificial intelligence-driven shakeout in the heavyweight technology sector is set to keep stock investors on edge in the coming week while a barrage of data could shift focus ⁠to the health of the economy. A deepening rout among software stocks commanded Wall Street's attention this week, as investors worried about the extent to which AI would upend business models throughout the industry. Further weakness in the tech sector, which holds massive weight in the major U.S. equity indexes, dragged on the market for much of the week.

On Friday, stocks staged a strong rebound, with the Dow Jones Industrial Average crossing 50,000 for the ‌first time, led by a ‌surge in shares of semiconductor companies. Below the surface, investors have been encouraged about a rotation from tech to other parts of the market that underperformed for most of the bull market that began more than three years ago. While tech has ‌struggled, energy, consumer staples and industrials have shined so far this year.

"Rotation is the dominant theme this year and continues to be as we see these old-economy sectors and stocks really get some love," said Angelo Kourkafas, senior global investment strategist at Edward Jones. "At the same time, the bar of expectations seems to be so high for tech that no matter what companies report, it seems like the natural inclination from investors is to take some profits."


Although the tech sector bounced back on Friday, the group has slid 9% since it peaked for the year in late October.

Over that period, most of the other 11 S&P 500 sectors have posted gains, including four with double-digit percentage rises.

But the benchmark S&P 500 has managed to eke out only a slim increase in that time. With the tech sector still accounting for about one-third of ‌the weight in the S&P ‍500, investors fear the index will struggle if tech continues to falter.

"A market can absorb a prolonged rotation with large sector winners without obvious ‍index-level stress for quite some time," Jim Reid, head of macro and thematic research at Deutsche Bank, said ‌in a note. "However, the longer and deeper the selloff in a dominant sector becomes, the harder it can be for the broader index to withstand the drag."

WHERE NEXT FOR SINKING SOFTWARE?

Stress is centering on software, with the S&P 500 software and services index tumbling 15% in a little over a week. Fears about AI disruption were compounded by disappointing earnings reports including from software giant Microsoft .

The fallout for software underscores how investors are increasingly trying to determine winners and losers from AI.

"Before, it was 'AI lifted all ships,'" said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. "Now, there are concerns that this massive acceleration in the technology space could cause other businesses to not see the kind of growth rate they did before."

The coming week will feature reports in the software industry from AppLovin and Datadog. Results are also due from high-profile companies including Coca-Cola , Cisco ‍Systems and McDonald's as fourth-quarter earnings season winds down.

EMPLOYMENT, INFLATION DATA ON TAP Monthly reports on employment and consumer prices will be released after both were pushed back slightly due to the recently ended three-day government shutdown. January's nonfarm payrolls report, out on Wednesday, is expected to show an increase of 70,000 ‍jobs, according to a Reuters ⁠poll. Investors are trying to assess whether weakening in ⁠the labor market has tapered off. While the Federal Reserve cited stabilization in the jobs market as it held interest rates steady last month, a survey on Thursday showed layoffs announced by U.S. employers surged in January.

Meanwhile, inflation remains "somewhat elevated" in the view of the Fed, with the January consumer price index due on Friday offering the latest insight into such trends. With the Fed describing diminished risks to both inflation and employment, markets are expecting the central bank to hold off on further interest rate cuts until its June meeting. By that point, President Donald Trump's newly nominated Fed chair, Kevin Warsh, could be in charge.

After the central bank cut rates at the end of last year, Fed fund futures have continued to price in roughly two further quarter-percentage-point cuts by December, expectations that generally held in the wake of the announcement of Warsh's nomination late last month.

"Rate expectations have been remarkably stable over the last couple of weeks," Kourkafas said. "We'll see if any either weakness in the labor market data or any surprising cool-down in inflation accelerates a bit the timeline for when the market thinks the next rate cut may be delivered."