Range-Bound and Rotating: The AI Trade Faces Its Test
This week of trading delivered another rotational shift beneath a headline market that appears deceptively calm. The S&P 500 (SPX) maintained a roughly flat stance, holding above support near 6,770 but again unable to clear the psychological 7,000 level. The Nasdaq Composite ($COMP) struggled to reclaim its 50-day moving average on Wednesday, reinforcing the sense that the broader market remains in an uncertain trading range and possibly still in a distribution phase. Yet underneath the index level, sector leadership and valuation dynamics continued to evolve in meaningful ways.
Major economic data this week offered incremental clarity but not resolution. Consumer and manufacturing indicators remained mixed, while bond markets continued to signal caution. The 10-year Treasury yield drifted closer to 4.0%, reflecting risk-off positioning and rotation into long-duration bonds as investors trimmed exposure to higher-beta equity segments. Despite Thursday’s sharp decline in semiconductor stocks, the VIX remained below 20, suggesting volatility remains controlled and that investors are hedging selectively rather than capitulating broadly.
Sector performance this week reflected continued defensive rotation alongside selective growth strength. Utilities and communication services ranked among the top performers, joined by consumer staples, which once again outpaced discretionary stocks. The staples-over-discretionary ratio remains elevated, signaling institutional caution and preference for stable cash flows.
Interestingly, technology has so far traded higher overall, even as semiconductor and AI hardware names sold off sharply yesterday.
The divergence within technology was stark. Nvidia (NVDA) led the decline, shedding roughly $259 billion in market value in its largest drop since last spring. Semiconductor stocks broadly followed, with the PHLX Semiconductor Index (SOX) down meaningfully on the week. The selloff reflected growing concern that the AI hardware trade may be peaking, with investors questioning whether data center spending growth can continue at the same pace. Institutions appeared to be selling into strength in AI hardware names, locking in gains from a powerful multiyear run.
At the same time, software stocks outperformed. Salesforce (CRM) and Snowflake (SNOW) both rallied following earnings, with investors responding favorably to disciplined cost control and stabilization in enterprise demand trends. The broader software ETF gained over the week, contrasting sharply with semiconductor weakness. Fears that generative AI tools would erode software moats appeared to abate, at least temporarily, allowing software valuations to stabilize.
Earnings were central to this dispersion. Nvidia’s results, while strong in absolute terms, failed to exceed elevated expectations, triggering profit taking. Meanwhile, Snowflake and Salesforce delivered reports that reassured investors on margins and forward visibility. Updated news surrounding Netflix (NFLX) gained fresh momentum after news broke that it would maintain capital discipline by refusing to overpay in a bidding war for Warner Bros. Discovery (WBD).
Cross-asset signals continued to align with cautious positioning. The U.S. dollar firmed modestly, while long-duration Treasurys rallied. Market sentiment among individual investors also turned more guarded. According to the latest AAII survey, bullish sentiment declined to 33.2% while bearish sentiment rose to 39.8%, reflecting growing skepticism as indexes struggle to advance.
Policy uncertainty remains in the background. Following the Supreme Court’s ruling that invalidated portions of prior tariff policy, the Trump administration has indicated that tariff rates could climb to 15% or more for certain nations pending new trade investigations. The prospect of renewed tariffs injects fresh inflation risk and adds another variable for markets already balancing growth concerns.
Valuation dynamics are also shifting. Recent rotation has pushed traditional value sectors such as materials, energy, and utilities to outperform year to date, even as earnings growth in those sectors remains modest. Meanwhile, the premium previously commanded by Big Tech has compressed sharply, bringing valuation spreads closer to pre-pandemic norms. The rapid narrowing of those gaps suggests the rotation may be maturing, warranting caution as fundamentals have not uniformly accelerated.
Looking ahead, investors will focus on next week’s key releases, including industrial production, initial jobless claims, retail sales, and the February nonfarm payroll report. With the S&P 500 trapped between support and resistance, semiconductors under pressure, and software attempting to regain footing, the market’s next decisive move may hinge on whether inflation data and labor trends confirm stabilization or deepen concerns about the durability of the AI-led expansion.
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