We're learning more about who's winning and losing in the AI revolution 🤖
Plus a charted review of the macro crosscurrents 🔀
📉The stock market declined modestly last week, shedding 0.1% to end at 6,932.30. The index is now down 0.7% from its Jan. 27 closing high of 6,978.60, but up 1.3% year-to-date. For market insights, check out the Stock Market tab at TKer. »
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We’ve discussed how, if AI is all it’s cracked up to be, the winners in the stock market should extend far beyond the large-cap tech hyperscalers currently building the AI infrastructure.
It’s still early, but so far, it hasn’t been clear who's demonstrably coming out on top in the AI race.
There have been numerous surveys and studies published about how AI is being used. But most fail to separate the ambiguous qualitative discussions from the more tangible quantified wins.
Sparkline Capital’s Kai Wu recently stepped up and tackled this problem. He dug into earnings calls and analyzed mentions of AI adoption. Specifically, he screened these mentions for references to AI-driven economic gains and returns on investment.
“Encouragingly, companies across a wide range of industries are deriving real economic value by applying AI to use cases such as consumer marketing, medical clinic optimization, auto plant automation, social media advertising, customer support, warehouse logistics, storage unit staffing, weapons manufacturing, software coding, supply chain logistics, pharmaceutical R&D, and insurance KYC,” Wu observed in a new note.
This is good news because we’re not talking about hypotheticals. We’re talking about real gains from deploying AI tools.
“Since 2017, the number of firms reporting AI-driven ROI or economic gains has surged from basically zero to 155 and 675, respectively,” Wu added. “While this still only represents 3% and 15% of our global stock universe, the trajectory is encouraging.”
Notably, he also found that the companies mentioning these gains have seen their shares outperform the market.
“Since 2017, firms merely discussing AI usage on earnings calls have outperformed the market by 3.2% per year,” Wu said. “More importantly, companies able to point to specific AI-driven economic gains or ROI have done even better, earning excess returns of 4.8% and 5.2%, respectively.”
Of course, any number of things can be driving those stock prices. And again, we’re still in the early innings of all this.
But at this point, it’s significant we’re getting tangible evidence of AI’s disruptive power.
Read Wu’s report here.
Software stocks are getting crushed 📉
The emergence and embrace of AI technology is leading to both winners and, unfortunately, many losers.
One of the more talked-about losers has been the software business, where AI tools have disrupted the economics of the sector. Why pay licensing fees for third-party tools when you can cheaply develop customized apps in-house with the help of AI?
In recent weeks, software stocks and stocks in related industries have been hammered.
On Wednesday, Deutsche Bank’s Jim Reid circulated this chart of how far down many of these stocks are from their 52-week highs.
The big market-moving news last week was that Anthropic released an AI-powered tool automating tasks for lawyers. From Bloomberg:
“A new AI automation tool from Anthropic PBC sparked a $285 billion rout in stocks across the software, financial services and asset management sectors on Tuesday as investors raced to dump shares with even the slightest exposure. … Anthropic is part of a rash of AI startups developing tools for the legal industry. … Anthropic stands in contrast, however, in that it builds its own models that can be customized for an industry’s specific needs. Its position in the AI ecosystem as a major model developer gives it the unique advantage of disrupting both traditional legal news and data services as well as legal AI upstarts.”
It’s not the most surprising development. But investors and traders appear to have been caught on their heels with regard to the speed at which these AI tools are becoming available.
But why did private equity stocks get hit? From Bloomberg:
“Anthropic’s Claude Code and other ‘vibe-coding’ startups are disrupting traditional SaaS by allowing users with no coding experience to build software. … The sector has been a hugely popular target for buyout firms and their private credit cousins. From 2015 to 2025, more than 1,900 software companies were taken over by private equity buyers in transactions valued at more than $440 billion, according to data compiled by Bloomberg.”
So there’s quite a bit of turmoil in the markets. And it’s not difficult to see why some stocks are doing worse than others.
The Zooming out 🔭
The AI revolution is sure to come with much more market volatility as we continue to learn about who’ll win and who’ll lose.
For now, the good news is that amid all the violent price moves, the S&P 500 continues to hover near record highs — a reminder that narratives will change, and yet the stock market will go up.
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Related from TKer:
It’s not bearish when the stock market’s leaders fall behind 🔀
How do I think of today’s AI craze relative to past bubbles? 🫧🤖🚂🚗
27 charts to consider as we look forward in the stock market 📊📉📈
🎲🎰 See me in Las Vegas!
I’ll be leading a breakout session at The MoneyShow TradersExpo in Las Vegas. The conference runs from Feb. 23 to 25. Sign up here!
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🚨Due to the brief government shutdown, the January employment report from the Bureau of Labor Statistics was rescheduled to Wednesday, Feb. 11.
💼 Job openings fall. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 6.54 million job openings in December, down from 6.93 million in November. This metric is at its lowest point since September 2020.
During the month, there were 7.50 million unemployed people — meaning there were 0.87 job openings per unemployed person. This remains one of the most straightforward indicators of labor demand. However, this metric has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and Revisiting the key chart to watch amid the Fed’s war on inflation 📈
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.76 million people in December. While challenging for the people affected, this figure represents just 1.1% of total employment. This metric remains slightly below prepandemic levels.
For more on layoffs, read: Mathematical context can totally change the story 🧮
Hiring activity remains well above layoff activity. During the month, employers hired 5.29 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In December, 3.20 million workers quit their jobs. This represents 2.0% of the workforce. The rate continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.
For more on this dynamic, read: The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
⚠️ Beware the other layoff report. Challenger, Gray & Christmas, which tracks layoffs in corporate announcements and regulatory filings, said U.S. employers announced 108,435 job cuts in January. “January’s total is the highest for the month since 2009, when 241,749 job cuts were announced,” the firm said.
These figures are unsettling. But it’s also worth noting that the sample represents a relatively small segment of the economy. Most layoffs occur quietly and are not made public.
The BLS, which uses surveys to estimate labor market turnover across the economy, U.S. employers lay off about 1.5 million to 2 million workers per month, even during economic booms. As we mentioned earlier, in January, employers laid off 1.76 million people, but that figure accounted for just 1.1% of total employment.
For more on understanding layoffs, read: Every macro layoffs discussion should start with this key metric 📊
👎 Private jobs creation remains low. According to payroll processor ADP, which tracks private payrolls, private companies added 22,000 jobs in January. Large businesses shed jobs while medium-sized businesses added jobs.
For more on what the private data providers are saying about jobs, read: The unofficial jobs data is unambiguously discouraging 💼 and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💰 Job switchers still get better pay. According to ADP, annual pay in January for people who changed jobs was up 6.4% from a year ago. For those who stayed at their job, pay was up 4.5%.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 New unemployment insurance claims and total ongoing claims rise. Initial claims for unemployment benefits increased to 231,000 during the week ending Jan. 31, up from 209,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, rose to 1.844 million during the week ending Jan. 24.
For more on the labor market, read: The next couple of years for the job market could be tough 🫤
💳 Card spending data is holding up. From JPMorgan: “As of 30 Jan 2026, our Chase Consumer Card spending data (unadjusted) was 4.8% below the same day last year. Based on the Chase Consumer Card data through 30 Jan 2026, our estimate of the US Census December control measure of retail sales m/m is 0.41%.”
From BofA: “Total card spending per HH was down 3.2% y/y in the week ending Jan 31, according to BAC aggregated credit & debit card data. The slowdown was most likely due to Winter Storm Fern. HI, groceries, gas, transit & general merch decelerated significantly. Moreover, there was little change in total card spending growth in CA and FL, which were unaffected by the storm.”
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Consumer finances remain in good shape 💵
⛽️ Gas prices tick higher, but remain relatively low. From AAA: “The national average for a gallon of regular is up a couple of cents from last week at $2.89. Gasoline demand is down, as fewer drivers hit the road during the recent winter storms. But this is the time of year when pump prices start nudging higher, as spring approaches and refineries start making the switch to summer-blend gasoline production. Current prices remain below what they were this time last year when the national average was $3.12.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
👎 Consumer vibes remain poor, but improve marginally. From the University of Michigan’s February Surveys of Consumers: “Consumer sentiment was essentially unchanged, inching up less than one index point from last month and sitting about 20% below January 2025.’
But some are doing better than others. From the report: “Sentiment surged for consumers with the largest stock portfolios, while it stagnated and remained at dismal levels for consumers without stock holdings.“
For more on consumer sentiment, read: The economy may not be working for everyone right now, but it’s at least working for stock market investors 🎭
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.11%, up from 6.10% last week: “For the last several weeks, the 30-year fixed-rate mortgage has remained at its lowest level in years. The combination of improving affordability and availability of homes to purchase is a positive sign for buyers and sellers heading into the spring home sales season.”
As of Q3, there were 148.3 million housing units in the U.S., of which 86.9 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
👍 Manufacturing activity surveys signal growth, but also caution. From S&P Global’s January U.S. Manufacturing PMI: “News of the joint largest rise in factory production since May 2022 is tainted by reports of ongoing subdued sales growth. Production growth consequently significantly outpaced that of new orders at the start of the year, resulting in a further accumulation of unsold warehouse inventory. Over the past three months, the survey indicates that factories have typically produced more goods than they have sold to a degree we have not previously seen since the global financial crisis back in early 2009. This highly unusual situation is clearly unsustainable, hinting at risks of a production slowdown and a potential knock-on effect on employment, unless demand improves markedly in the coming months.”
Similarly, the ISM’s January Manufacturing PMI signaled accelerating growth.
👍 Services activity surveys signal growth, but also caution. From S&P Global’s January U.S. Services PMI: “Sustained service sector growth, supported by a robust rise in manufacturing output in January, indicates the economy is growing at an annualized rate of around 1.7%. However, that’s a lower gear compared to the pace of expansion seen prior to December’s slowdown, and hints at GDP growth cooling in the first quarter.”
Similarly, the ISM’s January Services PMI signaled accelerating growth.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 4.2% rate in Q4.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and We’re at an economic tipping point ⚖️
Putting it all together 📋
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, appears to be modestly positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over three years, 85% underperformed. Over 10 years, 90% underperformed. And over 20 years, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% of the funds beat the index over the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
