In our latest episode, Gary analyzes three themes driving the markets this week: the diverging performances of the primary equity indexes; volatility in the tech markets driven by AI-disruption fears; and the imminent inflation (CPI) report. Watch the full video to learn more about how “rapid disruption creates winners and losers.”

TRANSCRIPT:

Hello, everyone. Welcome back to 7 Market Movers. My name is Gary Quinzel, Vice President of Portfolio Consulting. Thursday was a rough day for the market.

We're experiencing mixed equity returns, rising volatility around AI developments, and growing anticipation ahead of Friday's CPI report. Underneath the surface, equity leadership is rotating, sentiment is shifting, and investors are beginning to reassess risk. Let's break it all down into three themes that matter the most right now. The first story is about divergence.

The S&P 500 is slightly negative on the year, down around 1.5%. That doesn't tell the full story. The blue chip Dow Jones index is up nearly 1.5%. Meanwhile, the tech heavy Nasdaq 100 is down over 3%.

Growth stocks have struggled, while value has held up much better. International markets continue to outperform, partially influenced by the softer US Dollar. The MSCI Emerging Markets Index is up more than 11% year to date. This tells us something important.

We're not experiencing a broad market sell off. This is a rotation in its truest form. As you'd likely know, for much of the last two years, mega cap growth stocks have driven returns. But now, we're seeing capital rotate into international equities and more defensive sectors.

On Thursday, utilities and staples were up while tech sold off. That's not panic, that's just rebalancing. And historically, when we see broadening leadership, this can actually be healthy for the market. It reduces concentration risk, but it also increases volatility, particularly in prior leaders such as like we're experiencing today.

The second theme is AI, and this is where volatility has picked up materially. If we take a look at what happened in the market on Thursday, Cisco dropped 12% on margin pressure, Software ETFs were down 2%, and the Nasdaq dropped 2%, its fifth drop of more than 1% in the last ten days. We're definitely seeing more frequent large daily swings in tech. Here's what's changed.

For most of the last three years, the question was, how can AI enhance productivity and profitability? Now the question is, which companies are most vulnerable to AI disruption? That shift is powerful. The market is seeing fears that AI's cognitive replacement tools could impair profit models across software, insurance brokers, wealth managers, real estate, data providers, and even alternative asset managers.

This doesn't mean that AI is bad for the economy. In fact, it'll probably boost productivity and growth.

But in markets, rapid disruption creates winners and losers, and that's where volatility comes from. We've moved from AI-phoria to what some are calling AI-phobia. And whenever psychology shifts this quickly, price moves tend to overshoot in both directions.

Now let's talk about the next major catalyst, which is Friday's inflation or CPI report. Treasury yields fell on Thursday as the 10-year dropped to about 4.1% as investors cautiously positioned ahead of the inflation data.

Markets currently see little chance of a March rate cut, but a July cut is fully priced in at this point. So despite the growing consensus that inflation is falling, the CPI report still matters. If inflation comes in cooler than expected, it reinforces the narrative that price pressures are easing. It supports the case for mid year cuts, and it may stabilize yields and help growth stocks find footing.

If inflation surprises higher, yields will likely move up, growth stocks will face more pressure, and the timeline for Fed easing could shift further out. As noted, investor surveys show a majority now believe inflation is on a friendly glide path. But when expectations become comfortable, surprises move markets more. That's why this report carries outsized importance.

One additional note, as we're over 60% of the way through Q4 earnings season, it's also worth noting that earnings have been solid overall. Stocks in the S&P 500 are reporting double digit year over year earnings growth for the fifth straight quarter.

Companies with greater international exposure are reporting even stronger earnings growth, which helps explain some of the international outperformance. So the good news is that the macro backdrop is not collapsing, but valuations are elevated, expectations are high, and leadership is rotating. That combination can create choppier trading. So to sum things up, we're seeing rotation beneath the surface, AI disruption fears are are creating volatility, and the CPI report on Friday could determine the near term path for rates and risk assets.

This is definitely not a broken market. It's a market digesting change. And as always, having the right financial plan and disciplined investments matter most in periods like this. Thanks for joining us and we'll see you next time on 7 Market Movers.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances.

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