Overall market sentiment has shifted rapidly from how AI is going to change the world to how many areas of the market AI is going to damage. In recent weeks, we’ve seen sharp pullbacks in software, financials, and real estate as AI angst takes over.
On the other hand, a lower than expected CPI reading is moving expectations from “soft landing” to “no landing” as GDP growth and unemployment continue to hold off. It’s becoming a very bifurcated market where the major averages remain resilient and non-tech outperforms, but individual cases of major stock price damage are emerging.
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Market Moves
Weekly Market Snapshot:
- S&P 500: -1.4% – mega-cap tech continues to drag the major averages lower, but defensive equities, including utilities, consumer staples, and value are delivering big gains.
- Nasdaq 100: -1.4% – any area of the market that might be disrupted by artificial intelligence, tech or otherwise, is getting hit hard right now.
- Russell 2000: -1.1% – small-caps declining right alongside large-caps tends to be indicative of a deeper risk-off mood starting to set in.
- VIX: 20.6 – volatility continues to move higher as the “AI damage” trade has investors scrambling.
- Gold: +1.5% – gold price volatility has settled down somewhat, but Treasuries finally demonstrating some buying activity along with this moving higher would suggest building momentum for the safe haven trade.
- 10-Year Treasury Yield: 4.05% – Treasury yields finally broke sharply lower thanks to lower than expected inflation and growing fear from market participants.
Drivers:
We’re beginning to see more of the broader risk-off shift we talked about last week. The biggest development: Treasury yields moved sharply lower, exactly the type of behavior you’d expect to see as investors begin to panic. The other concern we see is which areas of the market are leading. Utilities, consumer staples, and value are all outperforming by a wide margin this year. Gold is still up more than 10% year-to-date and tech is approaching correction territory. A surprisingly strong jobs report this week and the positive move in inflation aren’t doing much to calm investor nervousness.
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Economic Highlights
A couple of the notable themes that stood out this week:
The Start of a Disinflationary Trend?
The market finally got some good news on the inflation front. January CPI fell to a 2.4% year-over-year increase, below expectations and the lowest reading since May.1 The street has been worried about the impact of tariffs for more than a year now, but we’re still failing to see a meaningful and sustained spike in prices. Lower gas prices are a big driver, but we’re also seeing moderation in food and shelter prices, two areas that have a major impact on perceived affordability.
One thing we’re watching is the latest Truflation index, which is a relative recent alternative inflation measures that was “born out of the need for more accurate and timely financial data”. It’s been showing the U.S. economy in a disinflationary trend since the 2nd half of 2025.2
Source: Lantern Capital & Bloomberg.
In 2022, the Truflation measure showed a similar trend months before the CPI data caught up. We just saw a sharp drop in the January CPI, but is there a much bigger drop ahead? If so, we’re probably looking at greater odds for rate cuts later this year, a drop in Treasury yields and perhaps a catalyst for higher stock prices as long as the impetus for such a move is a rapidly slowing economy.
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Jobs Report: Strong Start to 2026, But A Miserable Finish to 2025
The U.S. labor market has been a major question mark for several months. Slowing job creation and falling job openings strongly suggest that business activity is slowing and companies are trying to trim labor costs. Since job market trends tend to be strongly correlated with recession risk, this has been on the radar of market watchers for some time.
In January, however, we got some good news and bad news.
Non-farm payrolls jumped by 130,000 last month, well above expectations for a roughly 70,000 increase and the highest monthly increase since December 2024.3
On the downside, the U.S. economy added just 181,000 jobs total for the full year 2025. That’s a pretty miniscule number in aggregate and shows that the U.S. job market has largely stagnated. Monthly reported numbers often get revised lower in subsequent months once more data comes in, so it’s too early to say that the labor market is rallying again. It’s a good sign for resilience, but also a sign that the economy is teetering perilously close to contracting.
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Consumer Spending Shows Signs of Cracking
One of the big themes of the past year has been how resilient consumer spending has been despite rising debt levels and complaints about affordability. It turns out that maybe you can’t escape the trend after all!
U.S. retail sales growth came in flat in December compared to the same month a year and dropped to 2.4% year-over year, the lowest rate of growth since September 2024.4
Source: Investing.com
A couple of things worth noting here:
December is generally the most important month of the year to watch since that covers the holiday shopping period. If sales were flat compared to last year, that means that consumers actually bought fewer things (accounting for higher prices in 2025 vs. 2024). That’s not the direction we want to see the economy heading in. Year-over-year retail sales are also trending lower for the 4th consecutive month.
We’re still not seeing consistent month-over-month declines yet, but this could be an early sign that consumers are finally running out of steam and purchasing capacity. Despite warning signs elsewhere, market watchers have repeatedly pointed to consumer spending as a reason to believe that we’re not headed towards a recession. If that narrative begins breaking down, the markets could quickly respond.
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The Week Ahead
A few themes to watch next week:
In Summary
The markets are unquestionably becoming more nervous here. Last week’s economic data largely delivered what investors would want to see. The fact that stocks still look shaky suggests that we could be seeing a big unwind from last year’s AI/tech rally. Outside of tech and growth, many areas of the market are still delivering strong gains. The fact that a lot of that buying is happening in more defensive areas of the market suggests that investors are definitely taking risk off the table here.
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