Target Practice

The narrative surrounding Artificial Intelligence has shifted from growth opportunity to disruption fear. While 2024 and 2025 focused on the “AI winners” providing infrastructure, early 2026 has been defined by a sharp selloff in companies perceived as vulnerable to disruption by the rapid evolution of AI. Recently, the stock market has experienced some very targeted declines, as it seems that every day there is a new sector or industry is being targeted by investors due to AI disruption concerns.

It started with software stocks, which were shaky late in 2025, but since the new year, they have been pounded. The iShares Tech-Software ETF (IGV) is now back down to levels first breached in early 2021! Software was initially perceived as an AI beneficiary but is now increasingly viewed as at risk of being displaced by AI. Anthropic’s recently announced AI tools that can potentially displace software have accelerated the decline in software stocks. The inability to identify the companies at risk with any level of certainty has created a “sell first, ask questions later” approach among most investors.

Other Sectors Facing AI Disruption Concerns

Private Credit: The software problems extended into private credit, as loans to software companies are a sizable part of many private credit portfolios. Ares Capital (ARCC), Apollo Global Management (APO), Blackstone (BX), and KKR & Co (KKR) have all suffered sharp declines.

Financial Services and Wealth Management: Fintech startup Altruist launched an AI-powered tax planning tool that caused large declines in LPL Financial (LPLA), Raymond James (RJF), and Charles Schwab (SCHW).

Professional and Legal Information Services: News that Anthropic’s Claude model could automate legal processes caused sharp declines in Thomson Reuters (TRI) and several European firms.

Real Estate Services: Real estate valuations and property management appear vulnerable to AI-driven process automation. CBRE Group (CBRE), Jones Lang LaSalle (JLL), and Cushman & Wakefield (CWK) all suffered declines.

Freight Transportation and Logistics: The “AI scare trade” also extended to logistics companies, which are often labor-intensive middlemen. C.H. Robinson (CHRW), RXO Inc. (RXO), and Expeditors International (EXPD) all fell sharply.

The S&P 500’s “Teflon” Stability

Despite the violent swings in software and other sectors, the broader S&P 500 Index has remained remarkably stable. This stability is driven by a massive sector rotation where capital is exiting sectors viewed as vulnerable to AI disruption and flowing into sectors perceived as insulated from AI replacement. This rotation has allowed the equal-weighted version of the S&P 500 to outperform the tech-heavy, market-weighted S&P 500 Index. The big beneficiaries by sector have been Energy, Industrials, and Consumer Staples.

This surprisingly benign rotation began to show some cracks on Thursday this week when the fall of the logistics stocks was enough to bring the market down with it, at least temporarily. We hope the pace of this stock market target practice can slow down, but the market cap of the technology sector is very large, and therefore declines are difficult to overcome. The AI impacts are also reaching deeper into the rest of the market and that makes this rotation very fragile.

We came across a quote on Friday from DC Economics on Instagram which read: “Over the last 8 sessions, 115 stocks in the S&P 500 have declined 7% or more in a single day. The average drawdown when that happens is 34%. Right now we’re 1.5% below the all-time high.” That is an incredible statistic and demonstrates the increasing fragility of the stock market. This target practice cannot go on much longer without impacting the S&P Index more substantially. We remain hopeful that the indexes can simply take a breather through this rotation and Friday’s price action was encouraging, but the violent rotation could easily morph into broad stock market weakness.

As we have suggested to clients along this road, these gyrations have been expected. Major technological changes are never an easy path. It has not, however, changed our longer-term view that the value creation and disruption of AI will continue to present investment opportunity. The current market is the reason for portfolio diversification, and after the huge tech run-up, some attractive values may finally appear.

Have a great week!

 

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Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that no such statements are guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

 

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By: Adam