The significant rebound in the US stock market will only make investors more anxious?

Last Friday, U.S. stocks rebounded strongly, with the Dow Jones Industrial Average soaring over 1,200 points and breaking through the 50,000-point mark for the first time. However, this rebound not only failed to soothe market sentiment but also intensified investors' concerns about future volatility. Doubts surrounding the disruptive effects of artificial intelligence and the return on massive AI expenditures remain persistent, exposing the market's fragility.

On Monday, Asian stock markets surged significantly, continuing the approximately 2% rebound momentum from Wall Street last Friday. The S&P 500 index recovered most of its previous losses last Friday, ending the week nearly flat. In the previous trading days, a wave of selling in software stocks affected tech giants, the private credit market, and even the corporate bond market. Investors are worried that the industry disruption brought by AI may be broader than expected, and companies planning to invest hundreds of billions of dollars in AI development may struggle to meet lofty profit expectations.

However, the contradictory signals in the market rebound highlight this anxiety. Despite the surge in the broader market, Amazon's stock fell 5.6%, erasing about $133 billion in market value, after the company announced it would invest $200 billion in AI-related projects this year. Alphabet's stock also dropped 2.5%. The four major cloud service providers plan to spend a total of about $650 billion this year.

This turmoil has prompted investors to reassess their position allocations. Some institutions plan to reduce their exposure to tech stocks and instead increase their holdings in the industrial and materials sectors. Weak economic data has further deepened market unease, with investors preparing for more volatility.

Software Stock Sell-off Triggers Chain Reaction

Last week's market turmoil stemmed from investors' concerns about AI disrupting the software industry. "Artificial intelligence seems quite intelligent in programming," said David Kelly, Chief Global Strategist at JP Morgan Asset Management. "Companies won't abandon software embedded in all systems overnight. But as a long-term challenge, AI appears to be a legitimate threat to the software industry."

According to Jefferies analysts who recently informed trading clients, hedge funds have long been reducing their exposure to software stocks. The sell-off was "extreme" and "completely disregarded prices" at its peak.

The chain reaction from this sell-off has left anxious investors eager to determine where the next blow might fall. Clark Bellin, Chief Investment Officer at Bellwether Wealth in Nebraska, stated that his firm plans to reduce its exposure to tech stocks and use those funds to increase holdings in industrial and materials sector stocks. "It makes you worry about which areas are almost purely driven by speculation," Bellin said.

For some, last week's extreme volatility reignited long-standing concerns about AI's dominance in the stock market and the economy. Investors have long worried that the remarkable gains of AI stocks in recent years have made the stock market's rise overly dependent on a few tech giants, and the massive expenditures by some of the world's largest companies on AI obscure broader weaknesses in the economy.

Economic Data Adds to Concerns

Recent data has provided little comfort. According to the Labor Department's monthly report, the number of job openings in the U.S. decreased by nearly 1 million last year. According to estimates from human resources firm ADP, only 22,000 new jobs were added in the private sector in January, less than half of analysts' expectations surveyed by The Wall Street Journal. The January employment report was delayed due to a brief government shutdown, making investors' assessments of the economy more ambiguous "The economic data is quite weak," Kelly said. "We have a C-level economy supporting an A+ level stock market, and I think that's part of the problem."

This week, investors will see the delayed January employment report and the latest inflation data, which could impact interest rate policies and market direction in the coming months. Lower interest rates would be good news for tech investors, who are still recovering from last week's hit.

Cautious Response to Ongoing Volatility

As investors pull out of tech stocks, there are signs that funds are rotating into other sectors. The consumer staples sector was the best-performing sector in the S&P 500 last week. Investors typically view this sector as a defensive choice, as people will still buy essentials even during an economic slowdown.

The Russell 2000 small-cap index rose 3.6% last Friday. However, some investors have recently made large bets that this relief will not last. Data from the Chicago Board Options Exchange shows that the "skew" indicator for options on the iShares Russell 2000 exchange-traded fund, which tracks small-cap companies, hit its highest level since November of last year earlier this week. A higher skew typically indicates that put options, which are usually used to hedge against declines, are more expensive relative to call options that represent bullish bets.

Nevertheless, some investors believe that strong corporate earnings will help drive the stock market higher. According to FactSet data, S&P 500 constituent companies are expected to see profits grow by 14% in 2026. Edward Jones Senior Global Investment Strategist Angelo Kourkafas stated:

"The bull market is still intact. We will view any pullback as a real opportunity to re-engage."

But even though last Friday's rebound suggests that investors believe the sell-off was overdone, almost no one denies that the long-term outlook for software companies that triggered the recent sell-off, as well as other companies on the path of AI advancements, is becoming more uncertain. Many still expect the volatility characteristic of early 2026 to persist.

"I don't want to paint this as the end of the world, but I think the volatility will last for a while," Bellin said