AI Disruption Fear Runs Amok
The stock market just got a look at how disruptive investor concerns over AI could become across multiple industries.
What began as a shake-up in software stocks spread to the wealth management, transportation, and logistics industries last week, raising questions about just how deeply AI could transform not only tech but also high-fee service businesses.
The S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) both ended the week down more than 1% as Financial Services (XLF), Consumer Discretionary (XLY), and tech stocks sold off on AI concerns. The Dow Jones Industrial Average (^DJI) was down 1.2% for the week, while the Nasdaq Composite (^IXIC) dropped 2% and the S&P 500 (^GSPC) slipped 1.4%
"That's the dark side of AI," Innovator Capital Management chief investment strategist Tim Urbanowicz told Yahoo Finance. "We need to pay attention to that because I do think there's going to be other industries that are disrupted, and this is certainly a threat."
Shares of C.H. Robinson (CHRW) and Universal Logistics (ULH) closed out the week with losses of 11% and 9%, respectively, after a Florida-based company announced a new tool that would scale freight volumes without increasing headcount.
The sell-off echoed a drop in wealth management stocks like Charles Schwab (SCHW) and Raymond James (RJF), which fell 10% and 8%, respectively, for the week, after the launch of an AI-driven tax tool that allows advisers to customize strategies for clients. The tool raised fears that automation could put pressure on the industry's high advisory fees.
The "AI scare trade" has now spread across multiple industries, with software stocks getting hammered in recent weeks amid fears that AI will take over tasks traditionally handled by enterprise giants like Salesforce (CRM) and ServiceNow (NOW) and disrupt their revenue models.
The Tech-Software Sector ETF (IGV), which also includes heavyweights like Microsoft (MSFT) and Palantir (PLTR), is down 22% year to date.
Many on Wall Street consider the sell-off overdone.
"I don't necessarily think the bottom is in here," Urbanowicz said. "Margins are through the roof in this category of stocks. Those haven't come down yet, and valuations still are pretty elevated."
That said, Urbanowicz still sees a "very supportive backdrop" for stocks, forecasting the S&P 500 at 7,600 by the end of the year.
Part of that has to do with a supportive regulatory backdrop from the Trump administration, corporate tax incentives from the Big Beautiful Bill Act, and leadership in other sectors, like Energy (XLE), Consumer Staples (XLP), and Materials (XLB), which are all up double-digit percentages year to date, compared to Technology (XLK), down 2.5% during the same period.
Amanda Agati, chief investment officer of PNC Asset Management Group, recommends looking past the volatility and focusing on the broader theme.
"I think this is a short-term blip, and the fact that we're seeing pretty significant market breadth outside of these one-off names ... really gives me confidence that the rally is sustainable even though it's going to be a choppy year," Agati told Yahoo Finance.
UBS strategists recently said investors should look beyond tech as a way to navigate potential risks and fully capture the upside AI could bring across industries.
"We also believe companies that actively use AI to enhance operations and evolve their business models should benefit, especially those in the financials and health care sectors," Ulrike Hoffmann-Burchardi, CIO Americas and global head of equities at UBS Global Wealth Management, said in a recent note.
John Towfil of CNN also reports on why the 'AI scare trade' might not be done:
A sell-off rippled through software, real estate and trucking stocks this past week as investors worried artificial intelligence could upend some industries — and analysts say the white-knuckle drops might not be over yet.
Software stocks bore the initial brunt of AI disruption nerves. But those fears soon spread to insurance companies, brokerage firms, real estate services — even logistics and trucking.
“Market is in shoot first, ask questions later mode, with any names/sectors that could be impacted by AI disruption taking a hit,” Mohit Kumar, a strategist at Jefferies, said in a note.
The slump in shares points out a major change for investors going forward: AI, which had been powering big rallies in tech and other stocks for months, could now actually drag on some parts of the market.
Financial services
Shares of major insurance brokers fell on February 9 after Madrid-based startup Tuio unveiled a new insurance app built with ChatGPT, according to UBS.
That sparked fears that AI tools could eat into existing companies’ business models and customer bases. Shares of professional services and insurance companies sank. Marsh shares (MRSH) tumbled 7.5%. Arthur J. Gallagher shares (AJG) dropped 9.85%.
But Brian Meredith, an analyst at UBS, said in a note that he thinks the sell-off was “meaningfully overdone,” noting that insurance brokers remain “essential intermediaries” for household financial decisions, and it is unlikely AI will ultimately upend the industry.
On Tuesday, tech startup Altruist announced a new tax planning feature for Hazel, the company’s AI tool. That stoked fears that the specialized client services offered by brokerage and wealth management firms could face increased competition.
Charles Schwab (SCHW) shares dropped 7.42% Tuesday. Shares of financial services company LPL Financial (LPLA) and Raymond James (RJF) slumped 8.75% and 8.31%, respectively.
Real estate
Real estate services found themselves in the barrel on Wednesday and Thursday.
Cushman & Wakefield shares (CWK) tumbled 13.8% Wednesday and 11.5% Thursday. Shares of real estate service companies CBRE Group (CBRE) dropped 12.2% and 8.8% across the two days. Jones Lang LaSalle (JLL) fell 12.5% and 7.6%.
“We believe investors are scrutinizing high-fee, labor-intensive business models viewed as potentially vulnerable to AI-driven disruption,” Jade Rahmani, an analyst at Keefe, Bruette & Woods, said in a note.
And AI has the potential not just to compete with traditional real estate brokerages and agents, but to slash demand for office space in general, as AI executives predict their technology will eliminate swaths of the economy.
“If there are less office workers in the long run as a result of AI, there will be less demand for office space,” CBRE Group chief executive Bob Sulentic said on the company’s earnings call on Thursday morning. “That would be a long-term trend to unfold.”
Logistics
The Dow Jones Transportation Average — an index of 20 companies in the transportation industry — sank 4% Thursday and had its worst day since April.
The culprit was Algorhythm Holdings, which announced a new tool that could improve efficiency and better optimize the trucking business.
The reaction was swift: Shares of RXO (RXO), a freight company, plummeted 20.45% on Thursday. Shares of logistics company C.H. Robinson Worldwide (CHRW) dropped 14.54%.
“While perceptions of artificial intelligence are influencing recent market activity, C.H. Robinson has been a leader in AI for more than a decade and we believe AI will only continue to strengthen our performance and widen our competitive moat,” C.H. Robinson said in a statement.
Algorhym’s announcement was all the more surprising considering the company once specialized in selling karaoke machines before pivoting to become an AI and logistics company.
“It’s perhaps indicative of the state of markets at the moment that a $6 million market cap company that until recently specialized in karaoke helped wipe tens of billions off logistics stocks to add to the weakness,” Jim Reid, global head of macro research at Deutsche Bank, said in a note.
Algorhythm shares (RIME) rose almost 30% last week.
Where do stocks go from here?
Angelo Kourkafas, senior global strategist at Edward Jones, told CNN that “fear of AI disruption” has been a dominant theme in markets over the past two weeks. But the ripples permeating the stock market right now are themselves based on hypothetical scenarios, he said.
Kourkafas said the fears are more “speculative in nature” rather than based on immediate, fundamental changes to companies’ revenue streams.
“Yes, in the near term there could be fears of disruption across many different industries, but we know these companies are actively investigating ways to evolve and offer better platforms, products and services as a result of that,” Kourkafas said.
But Jonathan Krinsky, chief market technician at BTIG, said in a Thursday note that single-stock moves based on AI nerves are “getting more and more extreme.”
“At a certain point … we begin getting concerned that the weakness supersedes the strength and the broad market becomes vulnerable,” Krinsky wrote.
And Crystal Kim of Investopedia reports investors are dealing with AI fears by 'shoting first, asking questions later':
- Companies in the financial sector were the latest casualty of perceived AI-disruption fears.
- While some fears may appear overblown, it doesn't help that AI impact has become more measurable recently, making those concerns easier to quantify.
This week it was financials. Last week it was software and legal services. Perhaps next week something else will be crushed by fears of AI disruption.
Investors appear to have pivoted from worrying about AI getting over its skis in valuation terms, to fretting about what it could displace—and selling it.
Between Anthropic's unveiling of an AI model the company said would be better at tasks including financial analysis, research, and work involving spreadsheets, and with tech platform Altruist launching an AI-powered tax planning tool, investors have panned shares of financial companies like Charles Schwab (SCHW) and LPL Financial (LPLA) this week. The SPDR S&P Software & Services (XSW) and Financial Select Sector SPDR (XLF) ETFs are down 19% and 3%, year-to-date, respectively, while the benchmark index is in the green.
AI-related disruption, real or perceived, would appear to be entrenched in market vibes. That may, in part, be driven by the impact of the technology becoming more quantifiable. And it could be a source of indiscriminate selling going forward, with equity strategists saying "disruption-related volatility" is likely to be "recurring."
In a broader swath of companies tracked by Morgan Stanley, 30% cited at least one measurable impact of AI adoption in the fourth quarter of last year, the firm's equity analysts wrote Wednesday. That's up from 16% over the same period in 2024. That said, the perception of disruption has "unfairly" dinged companies, including those in the software and services sectors, the analysts said.
The firm listed a set of stocks that have been subsequently "mispriced"—including Microsoft (MSFT), Intuit (INTU), and Palo Alto Networks (PANW) as well as Sony Group (SONY), Tencent Holdings, and Spotify (SPOT).
Analysts across various firms are picking through their respective coverage universes to find stocks that deserve to be rescued because even valid concerns may have landed too early and too roughly.
"While difficult to disprove the bear narrative in software given fears are more about genAI implications for the industry in the out years, we contend that any meaningful disruption will likely play out over a much longer timeline than investors anticipate," Deutsche Bank's Brad Zelnick said in a Wednesday note.Meanwhile, Ed Yardeni of Yardeni Research, reaffirmed his "overweight" recommendation, effectively a bullish posture, for financial stocks, characterizing the recent decline in the sector as a "sell first, ask questions later" reaction.
Alright, Monday February 16th, President's Day in the US, Family Day in Ontario, British Columbia, Alberta, Saskatchewan and New Brunswick.
Most people are off today so it's a good time to tackle this "AI disruption fear" mania gripping investors and traders alike.
I can sum it up like this: "The 'AI tsunami' has arrived, it will rip apart many industries, not just software, it will decimate everything in its path, capitalism as we know it is ending, be prepared for massive structural changes the likes of which you've never seen before, yada yada yada"
Complete and utter horsesh*t if you ask me but proponents of the AI disruption trade are pounding the table and truth is the market is definitely in a "shoot first, ask questions later" mode.
Well folks, the market isn't always right, it wasn't right heading into the GFC, it wasn't right about the pandemic destroying the world and in my humble opinion, it's not right about Saas-Pocalypse.
But Wall Street always needs a story, brokers gang up to hit stocks so they can turn around to sell them on the cheap to their long list of elite hedge fund clients and by the time the tide turns and everyone breathes a collective sigh of relief, it's over, the elite hedgies made off like bandits and everyone else is still too scared to jump back into the market.
Now, I can't state for sure the software selloff on Wall Street is overdone but it sure feels like that to me:
Below, look at the list of the worst-performing US large cap stocks year-to-date (full list here):
It's mostly the sheer annihilation of software shares and the baby is being thrown out with the bathwater.
Next, check out the 5-year weekly chart of the iShares Expanded Tech-Software Sector ETF (IGV):
And really dig deep into the top ten holdings of this ETF which make up 60% of the assets:
I can go on and on but you get the picture, total destruction, multi-year lows, software is dead, long live hardware in the AI renaissance era.
Now, to be clear, the trader in me says stay away from this sector until things stabilize but I nibbled on IGV because I truly believe people are losing their marbles over this AI disruption trade and fears of a Saas-Pocaplyspe are way overblown.
I know, the speed at which AI is transforming the world is unparalleled and I have no idea of what is coming next.
No, I don't and neither do people who claim AI is taking over the world and hyperscalers are toast.
When I ask all my doctor friends if AI is taking over medicine like Elon Musk is warning of, they all tell me: "I wish he was right but it's the opposite, we have more work than ever, it's depressing."
Last night I wasted an hour going to put gas in my wife's car and waiting patiently to wash the exterior.
A whole goddamn hour which I used productively to watch Jordi Visser's latest weekly clip on how the Supersonic Tsunami Hits SaaS (embedded below).
Good clip, don't agree with a lot of his insights/ recommendations, think he's more interested in being right than making money but I always listen to his insights even if I don't agree with him (there is a lot of good stuff here worth noting).
Then I had a eureka moment: "If AI is taking over the world, where are the robots that fly to my house to put gas in the car and wash its exterior? Where are the robots taking over plumbers, electricians, landscapers and greedy contractors?"
Goddammit, AI isn't moving fast enough in areas that count!! -:)
I'm being facetious, of course, I know AI is moving fast and will change the way we live, hopefully for the better, but there's SO MUCH AI BS out there that I just had to wrote this comment and tell people to cool down and don't be swept into the AI hysteria.
Are hyperscalers spending a ton of money to be AI leaders? Are they incurring massive debt? You bet and it will impact their buyback power but maybe they know something others don't and when this AI revolution begins and they start monetizing on it in a massive way, maybe they will be proven right.
Are there going to be winners and losers in AI? Absolutely, there always are winners and losers after every technological disruption. Jordi Visser brought up Joseph Schumpeter's "creative destruction" and it's happening as we speak.
Still, this isn't gong to happen in a year, it will take ten years before we figure out how this AI disruption plays itself out.
Again, do not get swept up by the AI hysteria, listen carefully to all views but always ask yourself "are they talking up their book or do they really know what's going on?"
On that note, watch the clips I embedded below and enjoy the rest of your Monday, I will cover top funds' Q1 activity on Friday as rest of week is reserved to pensions.
First, in this week's video, Jordi Visser breaks down why he thinks we are now in the midst of what Elon Musk called the "supersonic tsunami", and why the acceleration phase of AI is rewriting market structure in real time. "Over the past week, the disruption spread beyond SaaS into insurance brokers, wealth management platforms, commercial real estate services, and trucking stocks. 115 S&P 500 names fell at least 7% over a rolling 8-day window, many near 52-week highs, a dispersion pattern we haven't seen since the dot-com rotation in 2000."
Next, $285 billion in market capitalization. Vanished in a week. Capgemini -9%. Publicis -9.2%. Teleperformance -5.8%. And it's not a general crash, it's surgical. A single company triggered the movement. Anthropic has just launched a two-pronged offensive that changes the rules of the game: Cowork (an autonomous agent that works within your existing systems) and Opus 4.6 (the smartest model on the market). SaaS, IT services companies, consulting firms: all in the crosshairs (Feb 7th).
Third, Chamath Palihapitiya, Jason Calacanis, David Sacks and David Friedberg jon the All-In podcast to discuss AI trends and whether thisis a debt spiral or new golden age.
Fourth, Dan Ives of Wedbush Securities says the recent software selloff is overblown. He says major players like Microsoft, Google, and Oracle will benefit from the ongoing AI infrastructure buildout and he sees many buying opportunities.
Fifth, Jonathan Golub of Seaport Research Partners says the tech basket of stocks is "incredibly attractive."
Lastly, Morgan Stanley Investment Management Portfolio Solutions CIO Jim Caron says the chance of the recent selloff in software-related stocks to create contagion is relatively low and it's a great time to be a stock picker instead of a passive investor.
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