A sharp rebound in U.S. stocks will only make investors more nervous?

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Last Friday, US stocks rebounded strongly, with the Dow Jones surging more than 1,200 points and breaking above the 50,000 mark for the first time. However, this rally failed to calm market sentiment and instead heightened investor concerns over future volatility. Doubts about the disruptive effects of artificial intelligence and the return on massive AI investments remain persistent, exposing the market’s vulnerability.

Asian stock markets rose sharply on Monday, extending the roughly 2% rebound seen on Wall Street last Friday. The S&P 500 index recouped most of earlier losses and ended the week roughly flat. In previous trading sessions, a wave of sell-offs in software stocks spread to tech giants, the private credit market, and even the corporate bond market. Investors fear that AI’s disruptive impact may be broader than expected, and those planning to spend hundreds of billions on AI infrastructure could find it difficult to deliver on lofty profit forecasts.

But contradictory signals in the market rebound highlight this anxiety. Despite the surge in the broader market, Amazon’s share price fell 5.6%, wiping out approximately $133 billion in market value after the company announced it will invest $200 billion in AI-related projects this year. Alphabet shares also dropped 2.5%. The four major hyperscale cloud providers are expected to spend around $650 billion in total this year.

The turmoil has prompted investors to reassess portfolio allocations. Some institutions plan to reduce exposure to tech stocks and shift toward industrials and materials. Weak economic data has further deepened market unease, and investors are preparing for more volatility.

Software Stock Sell-off Triggers Chain Reaction

The recent market shake-up stemmed from investor worries over AI’s disruption of the software industry. "AI does seem to be quite smart in programming," said David Kelly, Chief Global Strategist at J.P. Morgan Asset Management. "Companies will not abandon software embedded in all systems overnight. But as a long-term challenge, AI looks like a legitimate threat to the software sector."

According to Jefferies analysts, who recently briefed trading clients, hedge funds have long been reducing their exposure to software stocks. At its peak, the sell-off was "extreme" and "completely ignored price."

The ripple effects of this sell-off have anxious investors eager to determine where the next blow might land. Clark Bellin, Chief Investment Officer at Bellwether Wealth in Nebraska, said his firm plans to cut tech exposure and use those funds to buy stocks in industrials and materials. "It makes you worry what other areas are almost purely driven by speculation," Bellin said.

For some, last week’s sharp swings rekindled long-term worries about AI’s dominance in the stock market and broader economy. Investors have long feared that the eye-popping gains in AI stocks in recent years have made the rally overly reliant on a handful of tech giants, and that massive AI spending by some of the world’s largest companies masks broader weakness in the economy.

Economic Data Adds to Concerns

Recent data offers little comfort. According to the Labor Department’s monthly report, US job vacancies fell by nearly 1 million last year. According to HR firm ADP, only 22,000 new private-sector jobs were added in January, less than half what analysts polled by the Wall Street Journal expected. The January jobs report was delayed by a brief government shutdown, making investor judgment on the economy even murkier.

"Economic data is fairly weak," Kelly said. "We have a C-grade economy supporting an A+ stock market, and I think that’s part of the problem."

This week, investors will get the delayed January jobs report and the latest inflation data, which could influence interest rate policy and market direction in the coming months. Lower rates would be welcome news for tech investors still recovering from last week’s blow.

Approaching Ongoing Volatility With Caution

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 defensive, since people keep buying necessities even if the economy slows.

The Russell 2000 small-cap index jumped 3.6% last Friday. However, some investors have recently made big bets that this relief won’t last. Data from the Chicago Board Options Exchange global markets shows the "skew" indicator for options tracking the iShares Russell 2000 ETF hit its highest level since last November earlier this week. A higher skew generally means put options, commonly used to hedge against declines, are more expensive than call options, which represent bullish bets.

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

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

But even though Friday’s rebound suggests investors think the sell-off was overdone, almost no one denies that the long-term outlook for software companies and others in the path of AI advancement has become increasingly uncertain. Many still expect the volatility seen at the start of 2026 to persist.

"I don’t want to paint this as doomsday, but I think volatility will last for a while," Bellin said.

Risk DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice nor does it consider the specific investment objectives, financial situation, or needs of individual users. Users should assess whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investing based on this information is at your own risk. ```