Wall Street Faces Volatility Amid AI Concerns; Bitcoin Continues Decline

U.S. stock markets experienced volatility as investors grappled with the implications of artificial intelligence, while Bitcoin extended its February downturn.

The S&P 500 fluctuated throughout the day, initially declining nearly 1% before recovering to close nearly unchanged. The index briefly dipped below its 100-day moving average, a key technical indicator. While semiconductor stocks erased earlier losses, software-focused exchange-traded funds declined by 2%. Financial and industrial sectors posted gains.

Investor sentiment is divided regarding AI's impact. Some fear significant disruptions across various industries, leading to sell-offs in companies perceived as vulnerable to AI advancements. Others question whether substantial investments in AI will yield immediate returns. Notably, mentions of AI disruption in corporate earnings calls have nearly doubled compared to the previous quarter, according to a Bloomberg News analysis.

"The market is still close to record highs, but it may not feel that way to some investors because of the sharp selloffs that seem to derail upswings almost as soon as they begin," said Chris Larkin at E*Trade from Morgan Stanley. "If that theme persists, it could result in a bumpy road for the market, even if the overall trend is to the upside."

Investors are also monitoring upcoming economic data and the Federal Reserve's January meeting minutes for insights into potential interest rate adjustments. Chicago Fed President Austan Goolsbee indicated the possibility of further rate cuts this year if inflation continues to approach the central bank's 2% target.

Approximately 260 stocks in the S&P 500 advanced, with the index hovering near 6,840 points. The yield on 10-year U.S. Treasury notes remained steady at 4.05%. Bitcoin declined to around $67,500, continuing its February downturn. The U.S. dollar appreciated by 0.2%, while the British pound weakened following data showing U.K. unemployment at a five-year high, prompting increased speculation about potential rate cuts.

Oil prices fell amid signs of progress in U.S.-Iran nuclear negotiations. Gold prices dropped below $4,900 per ounce, influenced by reduced demand from Asia due to Lunar New Year closures. Silver prices also declined.

"We need tech/AI/Mag 7 to stabilize, and need to see less sell first/ask questions later behavior from investors," said Sameer Samana at Wells Fargo Investment Institute.

Certain technology and AI-related stocks have faced declines as investors reassess the potential returns on AI investments. David Morrison at Trade Nation noted that the S&P 500 remains below 7,000 points, with investors appearing "wary" of increasing exposure at current levels.

"First, the AI-blamed selloff started with the software industry, triggering renewed fears that AI companies will adversely affect their businesses," said Sam Stovall at CFRA. "Soon after, the sector version of 'Whac-a-Mole' kicked in, initiating rolling corrections in such groups as transportation, wealth management, insurance, and commercial real estate in succession, causing investors to wonder, 'Where next?'"

Stovall advises investors to avoid reacting emotionally to these market fluctuations.

"They remind us that AI will indeed offer cost savings from increased efficiencies and depth of analysis, but these should aid companies by making them nimbler and more profitable," Stovall added. "Today, the equity markets are going through a much-needed digestion of gains."

A recent Bank of America survey indicates that a record number of investors believe companies are overspending, with about 35% expressing this concern. Despite increased bullishness since June 2021, participants are reducing exposure to technology stocks. Additionally, 25% of respondents view an "AI bubble" as the top market risk, while 30% believe that capital expenditure on AI by major tech firms could lead to a credit crisis.

"A few months ago, the market debated whether AI was real," said Jean Boivin at BlackRock Investment Institute. "Today, it's seen as an active threat to business models. We believe the hunt to sort the winners and losers reinforces AI's massive buildout – and the borrowing spree to finance it."

Boivin notes that the market is focused on identifying companies exposed to AI disruption and determining which can adapt.

"We are still firmly in the AI buildout phase. The mega cap tech companies are spending heavily on chips, data centers and power infrastructure. This is a key reason why we still like infrastructure," Boivin noted. "What has changed is the market's focus: it now asks how AI adoption will translate into revenues and profits. This sorting of winners and losers means it's prime time for active investing."

Debt investors are concerned that major tech companies may continue borrowing heavily to develop advanced AI capabilities. This apprehension has revitalized the market for credit derivatives, allowing stakeholders to hedge against potential overleveraging. Credit derivatives linked to individual companies, previously uncommon among high-grade Big Tech issuers, have become some of the most actively traded U.S. contracts outside the financial sector, according to the Depository Trust & Clearing Corp.

While macroeconomic conditions have temporarily taken a backseat to AI-related disruptions, the two are interconnected in the long term. Evaluating AI's impact on macroeconomic factors is crucial for investment outlooks, according to Jason Draho at UBS Global Wealth Management.

"The debate over who will be the corporate beneficiaries and losers from AI shouldn't obscure the potentially large macro implications," he said. "Higher productivity, lower inflation, and labor market disruptions are all possible. While the terminal value for some companies may indeed be zero because of AI, the 'terminal GDP' for the entire U.S. economy is likely to be a lot larger in a decade because of that same AI disruption than had it not occurred."

Draho suggests that the overall economic output will increase due to AI advancements.

"The critical question for asset allocation is how will that pie be divided across society, and asset classes," he said. "Even if AI doesn't end up being particularly disruptive for labor markets, capital (i.e., investors) are still likely to get many of the benefits. That big picture conjecture on the division of macro terminal values is important to keep in mind while wondering which sector might be impacted next."

In corporate developments, Anthropic PBC's discussions with the Pentagon regarding an extension of their contract are delayed due to the company's request for additional protections on its Claude AI tool. Citigroup Inc. shares have potential for growth due to improving profitability, according to Morgan Stanley analysts. Warner Bros Discovery Inc. has agreed to reopen negotiations with Paramount Skydance Corp. after the latter proposed an increased bid and improved terms, setting the stage for renewed competition with Netflix Inc. UnitedHealth Group Inc.'s chairman and CEO, Stephen Hemsley, has invested in healthcare startups for years, raising potential conflict of interest concerns, as reported by The Wall Street Journal. Gemini Space Station Inc., the crypto exchange founded by Cameron and Tyler Winklevoss, announced the departure of three top executives following recent layoffs. AMC Entertainment Holdings Inc. is seeking nearly $2.5 billion from credit investors to refinance existing debt. General Mills Inc. lowered its fiscal 2026 sales outlook, citing a more challenging consumer environment. Genuine Parts Co. plans to split into two publicly traded companies after reviewing options for its automotive and industrial business lines. Danaher Corp. agreed to acquire Masimo Corp. in a deal valued at approximately $9.9 billion, expanding its presence in the medical supply sector. Blackstone Inc. is in advanced talks to acquire residential services provider Champions Group for about $2.5 billion, according to sources familiar with the matter. Enthusiasm for artificial intelligence program OpenClaw has driven a rally in shares of Raspberry Pi Holdings Plc, known for producing simple personal computers. Adani Group plans to invest $100 billion by 2035 to develop green-powered, AI-ready data centers, aligning with India's ambitions to become a hub for AI and cloud computing. Bayer AG is preparing to announce a $10.5 billion settlement to resolve current and future cancer lawsuits related to its Roundup weedkiller, according to sources. Emirates CFO Michael Doersam, instrumental in transforming the Dubai carrier into the world's largest international airline, will leave his position by the end of June.

Market movements include:

• Stocks: The S&P 500 rose 0.1% as of 12 p.m. New York time. The Nasdaq 100 fell 0.1%. The Dow Jones Industrial Average rose 0.2%. The Stoxx Europe 600 rose 0.4%. The MSCI World Index was little changed. The Bloomberg Magnificent 7 Total Return Index was little changed. The Philadelphia Stock Exchange Semiconductor Index rose 0.2%. The iShares Expanded Tech-Software Sector ETF fell 2.2%. The Russell 2000 Index fell 0.1%. The S&P 500 Equal Weighted Index fell 0.2%.

• Currencies: The Bloomberg Dollar Spot Index rose 0.2%. The euro fell 0.2% to $1.1831. The British pound fell 0.7% to $1.3538. The Japanese yen was little changed at 153.57 per dollar.

• Cryptocurrencies: Bitcoin fell 1.9% to $67,484.38. Ether fell 0.9% to $1,979.62.

• Bonds: The yield on 10-year Treasuries was little changed at 4.05%. Germany's 10-year yield declined two basis points to 2.74%. Britain's 10-year yield declined two basis points to 4.38%. The yield on 2-year Treasuries advanced three basis points to 3.43%. The yield on 30-year Treasuries declined one basis point to 4.68%.

• Commodities: West Texas Intermediate crude fell 0.8% to $62.40 a barrel. Spot gold fell 2.4% to $4,869.94 an ounce.

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