Energy, consumer staples, and U.S. Treasury bonds lead gains in 2026! Wall Street's "AI trading" has been "disrupted by AI."
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AI was supposed to be the most certain trading theme of the year. But it has turned into a threat—not to the tech giants building AI, but to asset-light companies at risk of being replaced by AI.
This week, the S&P 500 briefly saw its worst performance since November, only rebounding after Friday’s mild inflation data, as fears of AI-driven disruption spread across various markets.
Software companies, wealth management firms, brokers, tax advisors, and other white-collar industries have seen the profit margin expansion accumulated over the past decade repriced in just a few weeks. The shockwave even extended to the private credit market lending to these companies.
(This week, US utility stocks led as a safe haven from AI disruption, while financials were the worst-performing sector)
Wall Street's high-conviction bets have completely failed within six weeks. Fund managers, whose cash allocations hit historic lows and hedges fell to minimums at the start of the year, are now watching consensus trades collapse, as the most favored assets lose out to the least popular ones.
Energy, consumer staples, and US Treasuries are leading the 2026 market, while consensus AI bets made at the start of the year have fallen behind. The iShares 20+ Year US Treasury ETF (TLT) had its biggest weekly gain since April, while the S&P 500 tracking ETF (SPY) has lagged TLT by 2 percentage points since December, marking its worst start to a year in a decade.
AI transforming from “must-win” trade to “disruptive” threat
What was first seen as a highly certain investment theme—AI—is now becoming the biggest source of uncertainty in the market.
Investors are starting to question the timeline for returns on tech giants’ large-scale capital expenditures and whether remaining cash can keep supporting stock buybacks. Adam Crisafulli, co-founder of Vital Knowledge, said:
In the past few months, AI has hurt more stocks than it has helped.
Morgan Stanley Chief Investment Officer Jim Caron said on media programs:
We are experiencing a repricing of a certain market sector—namely, the software industry. The market fears this may cause contagion in other areas.
He is focusing on two issues: whether AI-driven losses will cause contagion, and how to hedge this risk through diversification.
Extreme positions amplify market swings
Two forces are intensifying US market volatility.
First is portfolio positioning. A Bank of America investor survey in January found cash allocations fell to a historical low of 3.2%, and nearly half of fund managers had no downside protection—the lowest level since 2018.
Second is leverage networks connecting seemingly unrelated portfolios, so a selloff in one corner triggers selling in another. James Athey, portfolio manager at Marlborough Asset Management, said:
The greatest risk here is an extra volatility shock. Everything appears highly correlated, so selling in one asset may force sales in others.
As WallstreetCN reported, broad selling in US stocks Thursday triggered metal algorithmic selling; some investors had to exit commodity positions—including metals—for liquidity. Gold fell over 3% that day, breaking below $5,000; silver plunged 11%.
22V Research’s Jordi Visser designed a model showing that even as VIX stays low and S&P 500 remains above its 50-day average, market interconnectedness is soaring. This pattern suggests stress is hidden under a calm surface.
Over the past two years, such stress signals appeared about once a month. In less than two months this year, they’ve already appeared a dozen times.
This week, VIX briefly broke the key 20 level—a widely watched threshold. Although readings showed no signs of panic, put option skew remains at historic highs, indicating the market is methodically paying for downside protection.
(Put option skew has surged since the start of the year)
Investment-grade bond ETFs (LQD), relative to high-yield ETFs (HYG), posted their best weekly performance since October, widening their lead for the year. This week, US 10-year Treasury yields closed at a two-month low.
(10-year Treasury yields closed at two-month lows)
Investors begin to adjust strategy
For now, severe volatility has yet to turn into a prolonged market crash.
The S&P 500 remains near record highs and credit spreads are still at ten-year lows. But judging from single-stock put and call trading volumes, hedging activity is increasing.
The Chicago Options Exchange’s put/call ratio has surged since January, rebounding from almost a four-year low.
ETFs tracking companies with high shareholder returns attracted $3.6 billion in new funds this month, the largest in Bloomberg-tracked so-called smart beta funds.
Analysts believe that if AI disruption headlines pause and volatility drops, with hedging flows shifting to more supportive strategies, US stocks may find support to rise. But, as Goldman Sachs’ Chris Hussey says:
AI is disrupting consensus across broad economic sectors, creating a conflict with macro data and company performance showing no signs of abnormality. Will group consensus prevail, or will the post-pandemic theme of continued economic resilience persist—US growth and corporate earnings remain strong? The answer may take quite some time to be determined.
Risk Disclosure and DisclaimerThe market has risks; investment requires caution. This article does not constitute personalized investment advice, nor does it consider individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their own circumstances. Invest accordingly at your own risk. ```