It would be the ultimate barbell trade, but I'm not sure most thought the start of 2026 would play out this way to this degree. I have been voicing concerns about the implosion of software stocks for a few weeks, and yet the carnage is far worse than I imagined, and there has been nowhere to hide.

But yesterday’s trading saw the voracious appetite of artificial intelligence (AI) shift deeper into other areas of the market. It is upheaval, which isn’t uncommon during industrial revolutions, but this is more than an automobile replacing the horse. 

Pac-Man on the Prowl

Here comes Claude - like Pac-Man, after eating a power pellet - on the prowl, devouring everything in sight. Yesterday, Anthropic introduced a new “plugin” for ‘Claude Cowork’ that included contract reviews. Each “plugin” creates a new vertical, and there are hundreds of potential future plugins across an array of businesses and industries.

Reading the Wrong AI Risk

Wall Street misdiagnosed the wrong AI threat to the credit market. Turns out it's not AI valuations deflating, but AI dismantling software companies. Private equity holds significant debt in software companies.

Last year, I covered the risks in private equity, and, for the most part, Wall Street experts claimed they weren't a big deal. Surprisingly, it turns out there are lots of issues for the masters of the universe and private equity:

• Software
• Lawsuits
• Payment-in-Kind (PIK) defaults
• Lack of transparency

Boring Wins the Day

Energy (XLE), Materials (XLB), Consumer Staples (XLP), Utilities (XLU), and Industrials (XLI) finished the session in the green.

The list of boring 100-year-old companies hitting 52-week highs was longer than my arm. In fact, market breadth was positive for the S&P 500 (55%), S&P 400 (58%), S&P 600 (57%), and the NYSE (54%), which also saw more highs than lows, and greater up volume-to-down volume.

Market Breadth	NYSE	NASDAQ
Advancers	1,444	1,977
Decliners	1,307	2,785
New Highs	275	291
New Lows	127	413
Up Volume	3.35 billion	4.98 billion
Down Volume	2.8 billion	3.38 billion

Today’s Dilemma

Now, the safe-haven sectors are overbought on a short-term basis, which sets up a dilemma for would-be buyers today: keep piling in, head for the sidelines, or dare I say, look at smoldering tech (XLK) names that might be oversold.

Earnings Lack of Oomph

There has been significant frustration with the lack of response to earnings beats, even those accompanied by higher guidance.

It looks as though the tone was set with big banks in the first week of earnings season.

The size of the “surprise” is smaller than in prior quarters. It’s a heck of a thing to have this, yet another hurdle, is the mood of the market has turned, and the better part of valor for many is to cut bait.

I saw big ‘pops’ in after-hours trading to earnings results:

• Enphase (ENPH)
• Match Group (MTCH)
• Lumentum Holdings Inc (LITE)
• Super Micro Computer (SMCI)

Today’s Session

There is still considerable uneasiness this morning, as the AI juggernaut has upended a bedrock of technology and has everyone wondering if their days are numbered.

We are now seeing profit-taking in hardware names as well.

There is no doubt that many names are oversold, but fighting the tape and the feeding frenzy is ill-advised.  That said, I see an overreaction to Advanced Micro Device’s (AMD) earnings results (they were great) and others', which means opportunities around the corner.

Meanwhile, the ADP jobs report came in at 22,000; the street was looking for 45,000.

Comments

AI: After AI writes most of the software, replacing people, it will start talking with other AI. When AI works with other AI, humans will be squeezed out of the loop and the wheels come completely off. Tim in Texas on 2/4/2026 12:34:54 PM

With today's bloodbath it looks like the wheels are already coming off! Remember it's a market of stocks and we need to find the winners. Mike M on 2/4/2026 1:25:41 PM

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