By Krystal Hur and Jack Pitcher
The snowballing retreat in software stocks that gathered up big tech, private credit, and even the corporate bond market this past week ended in a remarkable rebound, leaving investors bracing for more turbulence ahead.
Days of declines stemmed from investors' worries that the disruption from artificial intelligence might be more widespread than thought, and fears that the companies spending hundreds of billions of dollars on the AI build-out might fall short of delivering on the expected sky-high profits.
Those worries remain. But on Friday, the investors who have stepped in at moments of volatility to buy every dip in this bull run returned in force. The Dow Jones Industrial Average soared more than 1,200 points, topping 50000 for the first time. The S&P 500 trimmed losses to finish the week little changed.
"The bull market remains intact," said Angelo Kourkafas, senior global investment strategist at Edward Jones. "We would view any pullbacks as opportunities to really re-engage."
The tensions remain as stocks head into the new week. Even during Friday's surge, there were lingering signs of investors' skepticism about the mammoth amounts of cash being funneled into AI expenditures. Amazon.com shares slid 5.6%, losing around $133 billion in market value after the company said it plans to spend $200 billion on AI-related costs this year. Alphabet shares fell 2.5%.
Even if Friday's rebound suggests investors saw the selloff as overdone, few dispute that the long-term outlook for the software companies that triggered the recent selling, and other companies in the path of AI advances, is growing more uncertain.
"Artificial intelligence does seem to be rather intelligent at coding," said David Kelly, chief global strategist at J.P. Morgan Asset Management. "Companies aren't going to just ditch the software that is embedded into all their systems overnight. But as a long-term challenge, AI looks like a reasonable threat to software."
In the coming week, investors will get a look at the delayed January employment report and fresh inflation figures -- data points that could influence interest-rate policy and markets in the months ahead. Lower rates would be welcome news for tech investors, who are still licking their wounds from the past week.
Hedge funds have been reducing their exposure to software stocks for a long time, Jefferies analysts recently told trading clients. At its peak, the selling was "extreme" and "completely price insensitive," the analysts wrote.
For some, the past week's whiplash renewed long-held fears about AI's dominance in the stock market and economy. Investors had long worried that the eye-popping gains in AI stocks in recent years had made the stock rally overly dependent on just a handful of tech giants, and that massive spending on AI from some of the world's largest companies is hiding broader weakness in the economy.
The selloff in software and its ripple effects have left jittery investors scrambling to gauge where the next blow might fall. Clark Bellin, chief investment officer at Nebraska-based Bellwether Wealth, said his firm plans to trim its exposure to tech and use that cash to bolster positions in shares of companies in the industrials and materials sectors.
"It makes you worry about what other pockets have been driven up by almost pure speculation," said Bellin.
Recent data have offered little solace. The number of open jobs in the U.S. fell by nearly one million last year, according to a monthly report from the Labor Department. The private sector added 22,000 jobs in January, according to estimates from human-resources firm ADP, less than half the figure expected by analysts surveyed by The Wall Street Journal. The January jobs report was delayed by the brief government shutdown, clouding investors' read on the economy.
"The economic data are pretty soggy," said Kelly. "We've got a very sort of C-minus economy supporting an A-plus stock market and I think that is part of the problem too."
As investors have fled tech, there are signs of a rotation into sectors like consumer staples, the S&P 500's best performer during the past week. Investors often view the sector as a defensive play since people still buy necessities when the economy slows.
The Russell 2000 index of economically sensitive smaller stocks rallied 3.6% Friday. Yet, some investors have recently piled into bets that the reprieve won't last.
An options measure called "skew" for the iShares Russell 2000 exchange-traded fund, which tracks an index of smaller companies, earlier in the week touched its highest level since November, Cboe Global Markets data show. A higher skew usually signals that prices for put options, often used to hedge against downturns, are more expensive relative to calls, which typically represent bullish bets.
Some investors say they expect robust corporate earnings to help drive the stock rally. Companies in the S&P 500 are expected to report a 14% jump in profits for 2026, according to FactSet. At the same time, many still expect the swings that have characterized the early days of 2026 to continue.
"I don't want to paint this as a doomsday, but I think volatility is going to be [here] for a while," said Bellin.
Write to Krystal Hur at krystal.hur@wsj.com and Jack Pitcher at jack.pitcher@wsj.com
(END) Dow Jones Newswires
February 08, 2026 21:00 ET (02:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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