Software stocks have been ground zero for the market’s latest AI jitters, with the industry as a whole sliding about 15% in the past week. The selloff quickly spread to related parts of the market like media, education, and asset managers, while the Russell 3000 fell 10% over the same period, trading in unusually tight lockstep with software.

According to Goldman Sachs, the pain isn’t over yet.

An incomplete reset

Ben Snider, Goldman’s chief US equity strategist, argues that valuations for software stocks have adjusted, but growth expectations are lagging.

Last week’s software selloff pushed the industry’s forward P/E multiple from 36x in September 2025 all the way down to 21x today, the lowest absolute level since 2014. But consensus growth estimates for the industry haven’t caught up with the recent downturn, with analysts still pricing in roughly 15% two-year forward revenue growth (the highest expected rate in two decades) and record-high margin forecasts—assumptions far richer than what today’s multiple typically supports. Snider thinks that falling software valuations point to a forthcoming decline in expected growth, and a subsequent slide in share prices.

History says he’s right. During the early 2000s, newspaper stocks plunged roughly 95% between 2002 and 2009 as the internet disrupted their businesses, with share prices only stabilizing once forward earnings estimates finally bottomed. With AI introducing similar structural questions for software, Goldman argues that a durable bottom is unlikely until earnings expectations fully reset.

Beyond fundamentals, positioning adds to the downside risk. Hedge funds have reduced software exposure but remain net long, leaving scope for further selling if estimates fall, while mutual funds are already underweight. That points to less volatility ahead, but not yet a full capitulation.

What’s old is new again

Investors are stepping back from cutting-edge tech and rotating into parts of the market seen as less exposed to AI disruption. Goldman continues to favor value, with consumer staples, retail, energy, and food and beverage among the least affected industries.

The rotation is already visible in markets: Industrials now trade at a higher valuation than technology, while non-tech sector funds have drawn about $62 billion of inflows in the first five weeks of the year, more than the roughly $50 billion they attracted in all of 2025, according to Deutsche Bank.

In other words: the AI disruption in the software industry is far from over, and investors may want to look elsewhere for a while until the dust settles.—SY

🟢 What’s up

• Oracle surged 9.64% as D.A. Davidson upgraded the stock to Buy, pointing to upside from its OpenAI partnership.
• Kroger rose 3.86% after naming former Walmart executive Greg Foran as its new CEO.
• Valaris jumped 34.26% and Transocean climbed 5.94% on news of a $5.8 billion all-stock merger that would create a combined 73-rig offshore drilling fleet.
• STMicroelectronics gained 8.91% as the company expanded its partnership with AWS to support AI and cloud data centers.
• Nexstar rose 8.48% and Tegna climbed 8.76% with Trump backing the proposed deal between the two TV station operators.
• Samsung jumped 4.92% after kicking off large-scale production of its new memory chip.

What’s down

• Hims & Hers Health fell 16.03% after Novo Nordisk filed a lawsuit against the telehealth company seeking to block knockoff versions of Ozempic and Wegovy.
• Monday.com slid 20.79% despite beating quarterly expectations, weighed down by a weaker-than-expected 2026 outlook.
• Cleveland-Cliffs dropped 16.43% after reporting a Q4 EBITDA loss and flat year over year sales.
• IT infrastructure company Kyndryl plummeted 54.92% following the sudden departure of its CFO amid an accounting review due to accusations that it had manipulated its finances.
• Lab equipment provider Waters Corp slid 13.94% after forecasting first-quarter profit below Wall Street estimates.
• Workday fell 5.13% as CEO Carl Eschenbach stepped down, with co-founder Aneel Bhusri set to take over.

The Dow isn’t a key market barometer like the S&P 500 is, nor is it as flashy as the Nasdaq. But while the rest of the market was melting down last week, it was the stodgy ol’ Dow that climbed above 50,000 for the first time ever—and Wall Street thinks there’s more records ahead.

The Dow managed to pull off its historic gain thanks to a classic market rotation out of growth and into value. Investors rapidly lost faith in high-flying tech stocks last week due to rising fears that AI will decimate certain industries, accelerating a trend that has been slowly building throughout January. Clear evidence that the market has been cooling on tech can be seen in the performance of the S&P 500 (which is heavily weighted to tech thanks to the Mag 7) and the S&P 500 Equal Weight Index: the regular index is up just 1.74% in 2026, while its equal-weighted cousin has risen 5.6%.

Investors are turning away from digital-first businesses that could be disrupted by the next update from Anthropic or OpenAI, and are instead looking to companies that produce physical goods—or, as CNBC’s Mike Santoli noted, “Investors are selling 21st century “innovators” to buy 19th century businesses.” It doesn’t seem like that’s going to end anytime soon: Ed Yardeni of Yardeni Research recently pointed out that the Dow Theory is still alive and well, which is one reason why he expects the Dow to hit 70,000 by 2029.

That’s a pretty bullish call, though it’s nowhere near as optimistic as President Trump‘s prediction that the Dow would close at 100,000 by the end of his term in January 2029. It took the Dow 129 years to breach 50,000 for the first time, but if it can climb another 50k in just three years, we’ll be pretty impressed.—MR

You’ve probably heard of the 60/40 portfolio, in which steady bonds act as a hedge for volatile stocks.

But over the past few years, rather than offsetting one another, stocks and bonds have been working in tandem to climb higher together. Now, that very interconnectedness is posing a huge risk to the bond market, according to Bank of America strategist Eleanor Xiao.

In a recent research note, Xiao pointed out that the stock market’s returns since 2021 have propelled equities to new heights. As stocks soar, their share of a 60/40 portfolio often grows out of proportion, forcing funds to automatically rebalance in order to keep their allocations steady. To do so, funds will sell stocks and use the proceeds to buy more bonds—providing a nice, consistent boost to the bond market over the last half decade.

Xiao estimates that for every $10 trillion in a diversified portfolio, investors (on average) sold $37 billion worth of stocks every month, while buying $37 billion worth of bonds. That broke down into $19 billion in treasury bonds, $9 billion in corporate bonds, and another $9 billion in mortgage bonds. This rebalancing propelled some serious demand: Roughly 14% of all new Treasury issuance and 22% of new investment-grade corporate bond issuance came from mechanical rebalancing.

This year, however, will be different. Bank of America strategists expect the stock market to grow about 4.5% in 2026, far lower than in recent years, and foresee only two rate cuts from the Fed. The combination of lower equity returns and less economic support from the central bank means fewer investors cashing out their stocks and buying bonds, removing a key piece of support for the bond market.

Back to basics

While this is bad news for bonds, a side effect could be a return to the traditional bond vs stock dynamic.

In theory, a 60/40 portfolio optimizes risk and reward, with bonds hedging stocks; in practice, since investors were gobbling up bonds at the same time they sold outperforming stocks, both stocks and bonds have been rising at the same time. If demand from rebalancing slows, we could see bonds, perhaps counterintuitively, become a better hedge and diversifier.

It looks like bonds and equities are back to being frenemies.—LB

• Here’s why it’s so hard to find a job right now.
• Japanese stocks surged to a record high this morning after prime minister Sanae Takaichi’s sweeping victory in yesterday’s election.
• Alphabet is raising $20 billion from a debt sale to fund its massive AI spending.
• Meta Platforms is heading to court in both New Mexico and Los Angeles this week, as it faces lawsuits over how its social media platforms failed to protect young users.
• Uh oh: Inflation could be making a major comeback.
• Hedge funds are taking a record number of short positions on stocks as fears proliferate about how AI will disrupt various industries.
• Eli Lilly is buying Orna Therapeutics for $2.4 billion.

Economic reports: We’ll check in on small businesses with the NFIB optimism index, and there’s also the delayed US retail sales report from December. Speeches from Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan may be worth a listen

Earnings announcements: Coca-Cola, AstraZeneca, Gilead Sciences, S&P Global, Welltower, Spotify, BP, CVS Health, Barclays, Marriott International, Robinhood Markets, Cloudflare, Ferrari, Lyft, Ford, Datadog, and Fiserv