Hot Inflation and Ongoing AI Concerns Hit Market to Close February
Stocks dropped on Friday after the latest producer price index data came in much hotter than expected, adding sticky inflation to a list of concerns that has caused market turbulence this month.
The Dow Jones Industrial Average dropped 521.28 points, or 1.05%, to close at 48,977.92. The S&P 500 closed down 0.43% at 6,878.88, while the Nasdaq Composite lost 0.92% to settle at 22,668.21.
The S&P 500 and Nasdaq finished in the red for February amid growing fears about the impact of artificial intelligence on specific industries and the overall economy. Those fears were exacerbated after Jack Dorsey’s fintech company Block said it’s laying off more than 4,000 employees — nearly half of its workforce. Stocks in the financial sector and other areas of the market tied to the economic cycle pulled back Friday.
Stocks linked to private credit were under pressure again as investors anticipated that they could be potentially suffer as a result of UK mortgage provider Market Financial Solutions’ collapse. Apollo and Jefferies were among the laggards, dropping more than 8% and 9%, respectively. Shares of Blue Owl, which has been hit recently in the wake of its liquidity curbs and asset sale, fell about 6%.
Notable software names suffered losses as well Friday as they close out a terrible month. Salesforce tumbled more than 2%, as did Microsoft, which weighed on the Dow. Cybersecurity company Zscaler shed 12% after deferred revenue and billings in the fiscal second quarter missed expectations. CoreWeave fell 18% on disappointing guidance.
Nvidia extended its post-earnings slide with a 4% fall Friday. The stock shed more than 5% on Thursday, a surprise to many investors who remain bullish on the chipmaker given its blowout fourth-quarter results and upcoming product cycle. Market participants attributed the decline in shares to doubts around Nvidia’s deal with OpenAI, weak sentiment over the AI trade and skepticism about whether hyperscalers’ lofty AI capital expenditures are sustainable.
Fueling the downbeat sentiment, January’s producer price index — a measure of wholesale inflation — showed a 0.5% increase for the month. Economists polled by Dow Jones saw the headline reading coming in at 0.3%. Perhaps more concerning is that the core PPI reading, which excludes food and energy prices, recorded a 0.8% gain, much more than the 0.3% rise economists anticipated.
Stephen Kolano, chief investment officer at Integrated Partners, views the PPI report as an additional complication for investors on top of the already-existing anxieties surrounding not just AI capex and the risk of its disruption to industries but also other factors such as stress in the private credit market. Noting that the inflation reading seems to be more services driven, he thinks it’s a sign companies are possibly starting to pass through the cost of tariffs to the end consumer in order to maintain their margins.
“Inflation isn’t solved yet,” he said, adding that it creates this conundrum for the Federal Reserve of deciding whether to cut interest rates to spur growth or to hold steady to continue to fight inflation. “It just creates this uncertainty around which way is policy going to go in the remainder of the year.”
That’s not to mention the state of the labor market as another worry, Kolano said. Even though job growth last month was much better than expected, the investment chief said he isn’t sure that the labor market is stabilizing given that layoffs have been picking up. In fact, Challenger, Gray & Christmas reported earlier this month that layoffs in January hit their highest total for that month since the global financial crisis.
“I don’t see a clear sign that unemployment is not going to move higher just yet,” he said.
The Nasdaq posted a decline of more than 3% in February, seeing its worst monthly performance since last March. The iShares Expanded Tech-Software ETF (IGV) is down nearly 10% for the month, bringing its year-to-date losses to almost 23%. The S&P 500, meanwhile, recorded a loss of close to 1% in February, while the Dow climbed about 0.2%.
Rian Howlett , Karen Friar and Jake Conley of Yahoo Finance also report the Dow, S&P 500, Nasdaq fall to end volatile month as AI worries buffet markets:
US stocks sank on Friday after a measure of wholesale inflation came in hotter than expected and Block's (XYZ) surprise shakeup turned the spotlight on AI disruption risks.
The Dow Jones Industrial Average led the way down with a loss of 1%, or more than 500 points. Meanwhile, the Nasdaq Composite fell 0.8%, while the S&P 500 dropped 0.4%, respectively, on the heels of sharp closing losses for the tech-heavy indexes.
The Dow barely eked out a gain in February, keeping its nine-month winning streak intact, with the blue-chip index rising 0.17% for the month. The Nasdaq and S&P 500 declined more than 3.3% and 0.86%, respectively, for the month.
Ongoing worries over private credit rippled through the market, while concerns that AI could wreak havoc across a swath of industries also came into focus. Those fears were stoked on Thursday when Block co-founder Jack Dorsey said the fintech will cut nearly half its workforce due to AI productivity.
Elsewhere in corporate news, Netflix (NFLX) shares rose after the streaming giant abandoned its pursuit of Warner Bros. Discovery (WBD). That left rival Oracle (ORCL)-linked bidder Paramount Skydance (PSKY) to clinch a buy of the Hollywood studio, giving its stock a boost, too.
On the macro front, January’s producer price index rose 0.5% month over month, showing that wholesale inflation grew at a faster pace than the 0.3% rise economists expected. Core PPI — which excludes volatile food and energy prices — of 0.8% for the month also exceeded forecasts of 0.3%.
Looking ahead, Berkshire Hathaway (BRK-B, BRK-A) CEO Greg Abel is expected to publish his first annual shareholder letter on Saturday, after taking over from Warren Buffett. It will come out alongside the conglomerate's quarterly and 2025 update.
Software got punched in the gut in February
It's fitting that February ended with another tech sell-off led by software, as the iShares software ETF (IGV) dropped roughly 10% for the month after probing last summer's lows earlier this week.
A few names bucked the trend — RingCentral (RNG) gained about 40% while Cisco (CSCO) and SAP (SAP) were little changed. But the story is the breadth of the red and the technical damage.
Microsoft (MSFT) is down almost 9%, wiping out over $270 billion in market capitalization, while Oracle (ORCL) fell nearly 13% for a $60 billion drop. Palantir (PLTR), Intuit (INTU), and Palo Alto Networks (PANW) each shed about $25 billion.
On the other end of the tape, the biggest drawdowns were ugly: Unity (U) and Atlassian (TEAM) were both off over 35%, while Asana (ASAN) declined 30% and Zscaler (ZS) only a little less.
Alright, another crazy week in the US stock market, where we once again saw more selling of tech stocks in general, including beaten-down software stocks, although they look to be bottoming here.
Here are this week's best-performing large-cap stocks (full list here):
Among them are Paramount Skydance, Netflix, Dell, Block, and Thompson Reuters.
And here are this week's worst-performing large-cap stocks (full list here):
Among them are Novo Nordisk, First Solar, KKR, and Apollo Asset Management.
More impressive this week was how some of the mid-cap stocks rallied hard (full list here):
Among them are Applied Optoelect, Palvella Therapeutics, Iovance Biotherapeutics, and 10X Genomics.
Now more than ever, it's a market of stocks; you really need to pick your spots carefully.
In other big news, cutting nearly 40% of its workforce, Block loudly professed that the days of AI taking the jobs of humans has arrived.
Is a massive AI deflationary wave in the making? Maybe, too soon to tell.
Alright, enjoy your weekend, that's a wrap.
Below, BMO Senior Equity Analyst Brennan Hawkin joins 'Closing Bell Overtime' to talk the state of the private credit markets as the sector sees a downturn.
Next, Dan Ives, Wedbush Securities, joins 'Closing Bell' to discuss the rough week for shares of Nvidia, the recent funding round from OpenAI and much more.
Jason Lemire on LinkedIn shows why Nvidia's real liabilities are more than twice what is shown on the balance sheet (see his post here).
Third, Warren Pies, 3Fourteen Ventures, joins 'Closing Bell Overtime' to talk why he is bearish on the markets due to the impact of AI on labor.
Fourth, Tom Lee explains why February felt worse than it was, why Nvidia’s valuation stands out, and why March could be a turnaround month.
Lastly, legendary macro investor Stan Druckenmiller joins Hard Lessons for a conversation with Iliana Bouzali, Global Head of Derivatives Distribution and Structuring at Morgan Stanley.
Druckenmiller reflects on his early career and how he learned to act decisively and change course quickly when the facts on the ground shift. Hear how he would construct a portfolio if he had to start over today, why contrarianism is overrated, and which stock he regrets selling too early.
Amazing interview, Stan is the man, listen to his comments and why they went into biotech (totally agree with him), bought Nvidia early, why he's not a contrarian but not scared to go against the crowd when he has conviction and how he didn't learn macro at Soros but how to position properly when he has conviction.
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