Another week of “could have been worse” victories on Wall Street as traders weather one mini-crash in one sector after another and investors try to take sustenance from the relative outperformance of the majority of stocks. The S&P 500 was mostly flat last week, ending at levels first reached 112 calendar days ago, but at that moment in late October, the market was excitedly pricing in a positive backdrop of economic upturn spurred by the Federal Reserve’s “insurance” rate cuts and buoyed by an AI investment boom that promised more creation than destruction. .SPX 6M Mountain S&P 500, 6 Months The market is now one that prompts sharper questions and suggests only vague answers. – Is there really more downside to existing business than upside to new business amid the perpetual expansion of AI, as the bloodthirsty selling of some software, data services, financial advisory, and logistics stocks suggests? – Forward P/E (23.3) in 2015, given that AI capital spending plans for 2026 are significantly higher than expected just a month ago. Why is NVIDIA stock stuck at six-month-old levels despite falling to its lowest market premium since 2017? -Can the relative struggles of consumer stocks compared to traditional defensive staples be dismissed as just a lull in cyclical demand, or is it a worsening concern? – If deregulation and a revitalized capital market trend are the core beliefs about setting 2026, why is JPMorgan’s stock price back to last summer’s price and Goldman Sachs down 6% in the month since posting impressive profits? Should investors keep in mind the fact that the S&P 500 has found support three times this year to overcome a 3% decline, despite localized pain and severe whiplash within the market and failure to break above the 7,000 mark multiple times? Market Expansion “Two months ago, if you told me software was going to fall 30%, I would have thought the S&P 500 would be down at least 10%,” said John Kolobos, chief technical strategist at Macro Risk Advisors. So did Ricks, Microsoft, and Bitcoin, which are down another 30%. If you were to tell me that consumer staples and value are outperforming, I would say the S&P 500 should be lower. That’s not the case.” The index is flat, the wheels are rotating, it is constantly changing internally, there is a lot of rotation creating dispersion, but very little directional movement at the index level. ‘One person’s resilience is another’s instability, but so far widespread pain has been avoided (or deferred). The equal-weighted S&P 500 index has fully regained its enthusiasm for market “expansion,” outperforming the market-cap weighted benchmark by nearly 6 percentage points so far this year. Here’s a look at recent glory by median stock price on a 30-year scale: For those excited about the precedent of the early 2000s, when the broader list soared in relative terms after a tech-dominated mega-cap frenzy, note that most of the outperformance in the first three years of this century was due to the collapse of large-cap growth stocks rather than absolute absolute gains by ordinary companies. When interpreting the rapid changes in sector leadership over the past six weeks, it is difficult to separate a true real-time reassessment of a company’s outlook from the somewhat typical year-to-date mean-reversion movement in which consensus trades are tested and undervalued groups mechanically rebound. There were significant tactical market peaks in January or February in 2018, 2020, 2022, and 2025, all of which included momentum reversals and forced rotations as exacerbating factors. Nick Sabone of Morgan Stanley’s Institutional Equity Desk summed it up nicely in a Global Reflections article over the weekend, saying, “Every once in a while, the market demands an honest reassessment, and this week it showed just that.” Net leverage has fallen sharply, short selling outweighed long selling, and momentum, small-cap stocks, and retail favorites… Some of the most crowded factor tilts suddenly seemed to have lost their sense of security. Even in the absence of macro shocks, exposures can cause turbulence. All that is needed is a shift in the narrative. “It is certainly meaningful and helpful that the macro picture has remained virtually uneroded. Last week’s belated monthly jobs report and updated CPI data could have tipped the scales toward stagflation, but instead turned out better than feared, leading the Wall Street Journal to declare that the long-promised and often-questioned soft landing has been achieved. Broadly speaking, global markets are steering to price in reflationary impulses, higher nominal growth rates, fiscal easing, excess demand for real assets as regional stockpiles are built, and marginal buyer preferences favoring non-US assets. Trends in corporate profits are also not a cause for complete concern at this point. The S&P 500 index posted low-to-mid 10% earnings growth in the fourth quarter, beating consensus estimates by a few percentage points. While helping the market, it’s worth noting that reported earnings have significantly exceeded expectations for several quarters in a row, meaning the market is simply assuming such a margin of victory. Is it any wonder, then, that the S&P 500 index is trading at levels seen during the last lopsidedly strong reporting period three months ago? Rotation towards capital intensity In the US stock market, AI-induced panic is prompting a ferocious and desperate shift from crypto assets to physical values, despite the absence of severe macro fears or corporate stress. Here, Goldman Sachs plots the relative valuations of asset-light and asset-rich companies, compressing them toward zero. This shift away from the very high-yield, wide-moat information economy businesses and toward old-economy touch-and-feel products may be both overstated in the short term and instructive for evolving risk-reward trade-offs. With six major tech companies set to spend $700 billion in AI capital spending this year, investors need to think big about the impact. If there is any rational basis for such sums mobilized in a 12-month period, it must destroy, or at least threaten, a wide spread of enterprises. This led the market to look for different intermediaries that leverage core proprietary information for multi-layered ancillary services and constant price increases. Many of these companies had acquired the status of “compounders” among investors, and their shares were happily held by traditional growth investors. This includes enterprise software, of course, but also financial transaction processors, rating agencies, real estate brokers, and freight logistics companies. Not all the details make sense, but there’s definitely a buying opportunity here. But can such groups regain their doubts and regain their previous premium valuations quickly? Market Interest: While the overall market may appear healthy, bull markets rarely execute abrupt leadership changes at full speed. To be sure, enthusiasm for AI continues to flow, but only through the narrow channels of Alphabet stocks and memory storage stocks. However, don’t discount the possibility that at some point the mood may shift back from the Old Economy to a broader AI complex. Just last summer, the big risk was that the market would relentlessly compete with AI for everything, possibly creating a volatile bubble. This is almost the opposite of the current mode. Entering 2026, there were risks such as high investor sentiment, soaring valuations, and a focus on the theme of “accelerating the business cycle.” Those extremes are now reduced, if not completely neutralized. The imperative to “think big” also applies to the expected new supply of AI-specific stocks. The market is aware that the largest privately held companies in history are lining up to IPO with small stakes at valuations that exceed those already achieved with venture capital, government-backed investors, and strategic corporate investors. Now that tech companies’ share buybacks are waning, if companies like OpenAI and SpaceX/xAI really want to aim for stock valuations above $1 trillion, the public’s willingness to celebrate such towering market caps will certainly be tested. Or is the continued sell-off of the Magnificent 7 stocks the market’s way of giving room for such bullshit to invade the index?
