Weekly Market Recap: Markets Pull Back as AI Disruption Fears Drive Risk-Off Rotation
Market Overview
Markets shifted into a risk-off posture during the week of February 23, as concerns about artificial intelligence’s disruptive impact weighed heavily on sentiment. The S&P 500 and Nasdaq both closed the week lower, locking in a down February for each index, while the Dow finished the month relatively flat.
Technology and financials led the decline, pressured by worries about AI-driven displacement, potential job losses, and renewed scrutiny of private equity and credit markets. Even strong earnings from NVIDIA failed to inspire confidence, with shares reversing after an initial post-earnings rally. Early-week dip buying in beaten-down software stocks proved short-lived.
In contrast, defensive sectors provided relative stability. Utilities, consumer staples, and healthcare posted gains, reflecting a rotation toward more resilient areas of the market. Energy also advanced as crude oil prices climbed amid rising geopolitical tensions, including concerns over a potential U.S. military strike involving Iran.
International markets were mixed. Developed international equities managed modest gains, with the STOXX 600 marking its ninth consecutive positive month. Asia outperformed, particularly Japan, Korea, and Taiwan, supported by continued chip and memory demand tied to the AI buildout. The U.S. dollar edged slightly lower, offering minimal impact on overseas returns.
Federal Reserve Insights and Economic Roundup
Treasury yields continued their recent decline, reinforcing the defensive tone across asset classes. The 10-year Treasury yield has fallen roughly 30 basis points from its recent peak, with most of the move occurring in February. Notably, approximately 25 basis points of that decline reflects softer economic growth expectations rather than easing inflation concerns.
Core bonds benefited from the drop in yields, with Treasuries reaffirming their role as a safe-haven asset. Despite the rally, auction demand was mixed, suggesting investors may view the move in rates as somewhat stretched. With the 10-year yield still within a fair-value range of 3.75%–4.25%, we remain neutral on duration positioning.
On the economic front, consumer confidence rebounded modestly in February as more respondents cited plentiful job opportunities and improved six-month employment prospects. Spending plans for restaurants and travel also increased, supporting the discretionary outlook.
However, the broader trend in sentiment over the past year remains negative, driven by geopolitical tensions and trade uncertainty. Inflation pressures persist, underscored by firm wholesale inflation data and elevated ISM prices paid readings. Federal Reserve officials continue to signal a steady policy stance in the near term, with the balance of risks still tilted toward inflation. Core PCE is expected to moderate closer to 2.2% by year-end, but near-term price pressures may remain elevated.
The Week Ahead
Investors will turn their focus to a full slate of economic data that could influence expectations for growth, inflation, and Federal Reserve policy.
Monday: Final February readings on S&P Global Manufacturing PMI and the ISM Manufacturing Index will provide insight into the health of the industrial sector and pricing pressures.
Tuesday: Wards Total Vehicle Sales for February will offer a real-time read on consumer demand and big-ticket discretionary spending.
Wednesday: MBA Mortgage Applications, ADP Employment Change, and final Services and Composite PMIs, along with the ISM Services Index, will help gauge labor market momentum and the strength of the services economy.
Thursday: Challenger Job Cuts, Import and Export Prices, Q4 Productivity and Unit Labor Costs, and weekly Jobless Claims will shed light on corporate hiring trends, inflation at the trade level, and cost pressures.
Friday: The February Employment Report headlines the week, including nonfarm payrolls, private payrolls, wage growth, unemployment rate, and labor force participation, alongside Retail Sales, Business Inventories, and Consumer Credit - key indicators for consumer strength and overall economic momentum.
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