As investors move into the month of March, the investing landscape is changing – one in which technology optimism clashes with doubt and sector rotation is driven by more than just AI disruption. While many analysts remain bullish on the AI Super-cycle, several significant headwinds are creating volatility.
At the top of this list of headwinds is the pessimistic belief that the AI trade has reached a crescendo of sorts. Skeptics say peak capex spending is here and now. After years of massive investment in artificial intelligence, investors are shifting from excitement to scrutiny. (We live in very impatient times!)
Fighting against this temporary headwind, I believe the hyper-scalers will definitely monetize their huge capital commitments, but my argument doesn’t satisfy a market where the previously “can’t go wrong” software sector is suffering, as literally hundreds of thousands of seats in software-as-a-service companies disappear. Jack Dorsey of is now firing 40% of his workforce.
But let’s put this into perspective. When Elon Musk bought Twitter in 2022, he effectively fired 85% of the workforce within a year and is getting more production from the current staff at “X” than when it was called Twitter. Maybe Jack Dorsey is still a poor manager of human capital and his excuse to fire nearly half his company due to AI progression is just a way to rectify his poor corporate management structure.
It doesn’t stop there. Markets are becoming skeptical of AI companies, showing little discernment in distinguishing those that are delivering amazing gains from AI deployment. Case in point: Structural engineering software leader posted phenomenal Q4 sales, earnings, and guidance, and attributes its accelerating growthto AI. And the stock was rewarded.
For AI stocks, the market seems to want to “sell first, ask questions later” (aside from memory and data-center plumbing), so this is a moment of opportunity to perform some due diligence – to look at companies delivering accelerating revenue and earnings due to their intelligent AI investments.
The once-crowded trade in tech names seems to have run its course, so there is a high likelihood of more damage ahead for sectors where job risks are high – regional banks, insurance, online travel, accounting, legal services, entry-level coding, IT customer service centers, clerical work, logistics and procurement.
The market must also contend with Trump’s ever-changing trade policy, a macro theme in his first year. Ongoing uncertainty regarding tariffs (as related to the International Emergency Economic Powers Act, or IEEPA) is infusing fresh uncertainty about future multinational earnings.
This brings up the question of inflation. While the worst of the post-pandemic inflation surge is over, reaching the Fed’s idealized 2% target has proven difficult. is hovering closer to 3%, kept high by service costs and labor supply pressure. This sticky inflation is capping the number of rate cuts. Instead of a rapid rate decline, central banks are transitioning to a wait-and-see posture.
Historically, midterm election years are a source of market turbulence, and this year could be a real nail-biter. As Congress approaches the November midterm elections, debates over housing affordability, electricity costs, and healthcare will likely spike. Policy uncertainty typically leads to risk-off sentiment.
Lastly, there are signs of rising corporate default rates, what some analysts call “fresh cockroaches” in the credit system, focused on riskier bonds and regional banks. Strategists blame rapid AI disruption. Private credit funds have massive exposure to the software sector (up to 40% of some portfolios), and analysts now fear that many of these companies’ business models are rendered obsolete by the new AI agents.
A massive crash in public software stocks – like the , which fell 23% YTD – has trickled down to private debt. Over $17 billion in technology company loans dropped to distressed levels in just four weeks.
Against this highly fluid backdrop, plenty of sectors and stocks are doing well. With the 10-year Treasury yield at 3.86%, the bond market discounted the hot PCE number and signals some labor market pressure. This and the flight to quality from a $3+ trillion private credit-bubble have the potential to let out more air.
On the flip side, amazing advances in AI-based productivity will help those workers who know how to embrace the tools – in the trillion-dollar space race, a bull market in commodities, re-shoring and on-shoring of American business and quelling of U.S. enemies in Venezuela, Iran and Mexico’s cartels, with Q2 S&P profits set to grow by 15% giving savvy investors incentive to buy when fear is high.
For income investors seeking high yields and shelter from uncertainty, the go-to space now might be index covered-call ETFs, covered-call closed-end funds, emerging market debt, preferred stocks, mortgage REITs, convertible debt, investment grade bond ETFs, municipal bond ETFs, gold and silver income ETFs, and energy infrastructure ETFs. All these sectors are trading up and to the right, so be proactive and position your assets where fund flows are bullish, and the technical charts are solid.
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Navellier & Associates does not own Autodesk Inc. (ADSK) in managed accounts.
