As investors move into the month of March, the investing landscape is a changing environment where tech optimism that dominated the first 10 months of 2025 is clashing with doubt and radical sector rotation due to more than just AI disruption. While many analysts remain bullish on the AI Supercycle, several significant headwinds are creating volatility.
At the top of the list is the pessimism that the AI trade has reached a crescendo of sorts. Skeptics argue that 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.
I believe the hyperscalers will definitely monetize their huge capital commitments, but that doesn’t satisfy a market where the once “can’t go wrong” software sector is blowing as literally hundreds of thousands of seats in Software-as-a-Service companies disappear. Jack Dorsey of XLY Corp. (XLY), formerly Block Inc., is firing 40% of the workforce.
But let’s put this into perspective. When Elon Musk bought Twitter, 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 Twitter. Maybe Jack is a poor manager of human capital, and his excuse to fire half his company due to AI progression to save face is just a way out of poor corporate management structure.
It doesn’t stop there though. Markets are becoming skeptical of companies that haven’t shown a discernment of separating out those companies that are demonstrating amazing gains from AI deployment from their AI investments. Case in point, structural engineering software leader Autodesk Inc. (ADSK) that posted phenomenal Q4 sales, earnings and guidance attributes their accelerating growth trends to AI. And the stock was rewarded (I own ADSK).
I believe the market is at a point where “sell first, ask questions later” selling in the AI trade, aside from memory and data center pluming, is at hand. This is a moment of opportunity to perform some considerable due diligence to look at companies that will deliver accelerating revenue and earnings because of their intelligent AI investments.
What was formerly crowded trade in tech names toward cyclical sectors like energy, materials and industrials seems to have run its course. There is a high likelihood that more damage is ahead for sectors where headcount reduction risk is high — regional banks, insurance, online travel, accounting, legal services, entry-level coding, IT support customer service centers, clerical work, logistics and procurement.
Moving on, the market has to contend with Trump’s ever-changing trade policy that remains a dominant and unpredictable macro theme for 2026. Ongoing uncertainty regarding tariffs (specifically related to the International Emergency Economic Powers Act or IEEPA) is infusing fresh uncertainty about future multinational earnings. It is thought that increased costs for companies will be passed to consumers, which could dampen spending and drag on real GDP growth.
And then there is the question of inflation. While the worst of the post-pandemic inflation is over, reaching the final 2% target has proven difficult. Headline PCE is hovering closer to 3%, kept high by service costs and labor supply pressure. This sticky inflation is capping the number of Federal Reserve rate cuts. Instead of a rapid decline, central banks are transitioning to wait and see posture.
Historically, midterm years are a source of market turbulence, and this year could be a real nail biter. As the U.S. Congress approaches the November 2026 elections, debates over housing affordability, electricity costs and health care are expected to spike. Policy uncertainty typically leads to risk-off sentiment in the months leading up to the vote.
Lastly, there are signs of rising corporate default rates, what some analysts call fresh cockroaches in the credit system that are beginning to surface in riskier bond investments and regional banks. Strategists pointed to rapid, severe AI disruption. Private credit funds have massive exposure to the software sector (up to 40% of some portfolios), and analysts now fear many of these companies’ business models are being rendered obsolete by autonomous AI agents.
Source: www.ubs.com
A massive crash in public software stocks (the IGV ETF fell 23% year to date) has trickled down into private debt. Over $17 billion in tech company loans dropped to distressed trading levels in just four weeks. Golub Capital, which has 26% of its portfolio in software, cut its dividend by 15%, signaling that the party for private credit investors may be ending.
Against this highly fluid backdrop, there are plenty of sectors and stocks that are working. With the 10-year Treasury yield dropping to 3.86%, the bond market discounted the hot PCE number and is signaling some labor market pressure going forward. At least, that’s my take. That, and the flight to quality from the $3+ trillion private credit bubble that has the potential to let out more air.
On the flip side, the amazing advances in productivity that AI will bring to workers that know how to embrace the agentic tools, the trillion-dollar space race, the bull market in commodities, the reshoring and onshoring of American business and the quelling of U.S. enemies in Venezuela, Iran, Mexican cartels and high urban crime, with Q2 S&P profits set to grow by 14.9%, should give investors incentive to buy when fear is high.
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