Last week, US financial markets experienced a rare instance of extreme divergence, with Wall Street indices seemingly following two contradictory paths simultaneously. While the traditional industrial sector soared to remarkable levels, technology and financial stocks faced intense selling pressure. This apparent market schizophrenia reflects the uncertainty gripping investors due to two key factors: the alarming acceleration of artificial intelligence technologies and the murky economic outlook surrounding interest rates.
The economic context and the global impact of Wall Street
To understand the full extent of what's happening, one must view Wall Street not just as a US stock market, but as a key driver of the global economy. Historically, the relationship between growth stocks (such as technology) and interest rates has been inverse; the higher the interest rate or the longer it's delayed in being lowered, the higher the borrowing costs for these companies, thus reducing their attractiveness. What's happening today is a repricing of risk based on mixed inflation data, which has complicated analysts' calculations regarding when the Federal Reserve will intervene.
Performance details: Mixed numbers and record closings
In numerical terms, the week ended negatively for most, with the S&P 500 by about 1.4% and the tech-heavy Nasdaq the Dow Jones Industrial Average bucked the trend, and despite a slight weekly loss of 1.2%, it managed to close at a record high on Tuesday, buoyed by strong performances from companies like Honeywell, while Apple was among the biggest losers, according to CNBC data.
Artificial intelligence: A boon for development and a curse on traditional jobs
One of the most significant factors driving the markets was the "artificial intelligence phobia" that particularly affected the financial sector. Shares in this sector came under intense selling pressure after a major platform announced a new AI-powered tax planning feature. This development sparked existential fears about the future of traditional business models in wealth management and financial services, with investors worried that algorithms will replace human advisors, threatening the profit margins of major financial firms.
The Olympic Rally and the Federal Uncertainty
On the other hand, the industrial sector experienced what analysts described as an "Olympic-sized rally," with liquidity flowing into industrial companies as a safe haven amid declining technology appeal. Experts attribute this to the strength of the US economy's manufacturing sectors.
The third and most influential factor is the mixed economic data released last week. While some inflation figures theoretically supported the idea of an interest rate cut, the overall picture remains unclear. Investors who had been betting on a rate cut in March are now less optimistic, as the latest data has reinforced expectations of interest rates remaining unchanged for a longer period. This implies continued high borrowing costs, which are putting pressure on both emerging and developed markets.
