A pullback in the precious metals frenzy, a sharp drop in Bitcoin's value, and emerging weakness in the U.S. labor market—these negative factors, while not originating from the stock market itself, combined with a valuation reassessment of software companies, are enough to shake the foundation of the artificial intelligence-driven bull market. Although a rebound on Friday pushed the S&P 500 index to recoup its weekly losses, preventing a full market collapse, such recoveries following broad declines often occur during periods of prolonged market pressure. A closer look at the overall U.S. stock market reveals persistent cracks across various sectors, prompting investors to increasingly hedge against further downside risks.
"When investors begin to panic, the most overvalued sectors in the global financial markets are often the first to feel the pressure," said Mike Dixon, Head of Research and Quantitative Strategy at Haorui Investment.
Earlier market turmoil this week wiped out over $1.5 trillion in U.S. stock market value, leading investors to question several underlying market assumptions: Is the U.S. economy truly robust enough to support another year of double-digit stock gains? Could the promised productivity boost from AI instead severely impact multiple industries? Are retail investors distorting the market, turning safe-haven assets into high-risk bets?
This uncertainty triggered violent swings in software stocks, but the impact extended far beyond that sector. Momentum stocks, dominated by large tech companies, suffered their worst single-day plunge since the pandemic. Precious metal mining stocks experienced meme-stock-like wild fluctuations alongside the prices of gold, silver, and copper. Companies that rose with the Bitcoin boom cooled off amid a new wave of cryptocurrency volatility. Even consumer stocks, which had performed relatively well in recent months, were not spared from significant declines.
"The market is full of hidden pitfalls, and for certain assets and sectors, these pitfalls are gradually turning into value-destroying sinkholes," said Thomas Thornton, founder of hedge fund monitoring firm.
Beyond the sell-off in software stocks, the following sectors, individual stocks, and investment themes remain vulnerable after last week's major turbulence.
**Small-Cap Stocks** At the beginning of the year, investors began shifting away from overvalued tech sectors towards companies expected to benefit from economic recovery and lower interest rates, with small-cap stocks being a primary target. However, this investment bet failed last week, partly because the market adjustment was nearly universal, and the core issue lies in three labor market reports all showing worrying signs of weakness in the U.S. economy. Small-cap companies, with their exceptionally high reliance on domestic revenue, are more significantly affected by the local economic climate. Pressure on the employment market from AI also weighs on this sector, with small financial and tech firms being the most impacted by industry disruption. The Russell 2000 small-cap index's 7.6% gain recorded earlier this year now appears overly optimistic. "With labor market data continuing to weaken, the stock market may already be starting to price in increasing pressure on consumers," said Cameron Dawson, Chief Investment Officer at Xinfeng Wealth. A surprisingly strong consumer confidence reading on Friday temporarily halted the selling wave, but before that, the Russell 2000 index had already fallen more than 5% from its recent high.
**Metals Sector** The prices of gold and silver experienced massive swings, completely deviating from normal patterns, and related mining companies naturally followed suit. In 2025, shares of Newmont Corporation, the largest U.S. gold mining company, doubled, while smaller miners like Discovery Silver surged 1000%, but this trading frenzy is rapidly fading. On January 29, the VanEck Gold Miners ETF plunged 13%, its largest single-day drop in over five years. Despite a significant rebound during Friday's recovery, Haorui Investment's Dixon noted that this ETF and the entire precious metals mining sector lack "solid fundamental support." "Precious metals have transitioned from a niche commodity traded by professional investors to a popular speculative tool chased by retail investors," wrote Owen Lamont, Senior Vice President and Portfolio Manager at Arcadia Asset Management, in a report. "Forget meme stocks; we have entered the era of meme metals." For investors who view gold mining stocks as a safe haven during turbulent times, this phenomenon is alarming. Double-digit percentage moves in a single day or week are entirely inconsistent with the characteristics of a safe-haven asset. "This trading frenzy has become 'crazy'," said Sameer Samana, Global Head of Equities and Real Assets at Wells Fargo Investment Institute. "Almost every investment theme has been pushed to extremes, and gold and silver are no exception." The Canadian benchmark stock index, which has a very high weighting of mining stocks, fell significantly more than U.S. indices last week. Jean-Michel Gauthier, an analyst at Scotiabank, noted in a report on Thursday that gold mining stocks account for 14% of the S&P/TSX Composite Index; driven by strong performance in 2025, the index plans a rebalancing that could add up to nine gold companies, further increasing this proportion.
**Digital Asset-Related Sectors** Bitcoin, dubbed "digital gold" by its proponents, has performed even worse than physical gold, rendering the title meaningless. In the equity market, Bitcoin mining companies and so-called digital asset treasury firms (most notably Strategy) have suffered heavy losses. This week, Bitcoin's price fell below $65,000, hitting a 15-month low. Shares of Strategy plummeted 9.9%, even though the company's average cost for its Bitcoin holdings exceeds $75,000. Shares of other digital asset treasury firms like Metaplanet, MARA Holdings, and DeFi Technologies also declined. Companies providing cryptocurrency trading services were similarly hit. Galaxy Digital Inc. and Coinbase Global Inc. both saw their shares fall more than 20% this week, while the largest Bitcoin-tracking exchange-traded fund plunged 16%.
**Equity Capital Markets-Related Sectors** As fears grew that AI tools could displace businesses like electronic signature company DocuSign, Salesforce, and Workday, causing their shares to plummet, investors also began scrutinizing other back-office service providers across the economy that might face fundamental disruption from AI. A October report from The Conference Board indicated that 72% of S&P 500 companies have updated disclosures to state that AI poses a "significant risk" to their business, spanning various industries. Banks, travel stocks, professional service providers, and even the entire small-cap sector have come under market scrutiny. If AI's disruptive effect turns into a damaging shock, equity capital market activities such as mergers and acquisitions, initial public offerings, and stock and bond issuance could slow down. Analysts including Brian Folan at Principal Securities noted in a Thursday report that tech M&A deal volume grew 77% in 2025, and the market had expected this sector to continue contributing significant revenue to banks' capital markets divisions this year. "A few weeks of weak trading won't necessarily reverse this trend completely, but it certainly has a negative impact," Folan said. Market positioning in the software sector remains bearish, raising concerns about risk contagion.
Beyond banks and financial services, investors believe the software sell-off could spread further across the professional services domain. This week, shares of companies like Thomson Reuters Corp and Morningstar Inc. already experienced double-digit declines. "Will companies choose to hire external firms or use AI to handle related tasks?" questioned Keith Lerner, Chief Investment Officer and Chief Market Strategist at Principal Advisory Services. He suggested that companies in online education, media advertising, outsourcing services, and market research could see their revenue streams severely squeezed by AI. Year-to-date, shares of online education firm SmartClass have fallen 15%, while peer Coursera has dropped 20%.
**Dot-Com Bubble Era Favorites** Last week's tech sector slump repeatedly evoked memories of past bubble bursts. In fact, the extent to which value stocks are outperforming growth stocks has reached levels seen during the 2022 market crash and the early stages of the dot-com bubble burst. Brian Reynolds, Chief Market Strategist at Reynolds Strategy, pointed out that after 25 years, leading companies from the dot-com era like Corning and Cisco Systems have finally surpassed their historical highs from that period. He views this as a warning sign for investors still obsessed with top AI plays—stocks that have already tripled or more in recent years. "History doesn't repeat itself, but it often rhymes," Reynolds quoted Mark Twain, saying. "In a bubble, investors must maintain high discipline and ensure diversified asset allocation. If a stock's rally is spectacular, it's time to consider selling into strength."
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