Good morning investors,
There is a certain irony that the most consequential inflation report in months falls on Friday the 13th. After yesterday's 1.6% drop in the S&P 500, 2% plunge in the Nasdaq, and 1.3% decline in the Dow, investors could use some good luck. The January CPI print at 8:30 AM Eastern will either extend this week's pain or provide the catalyst for a sentiment reversal. Expectations call for 2.5% year over year headline inflation and 0.3% month over month, with core at 2.6%. A light reading could reignite hopes for Fed rate cuts and remind everyone that the broader economic picture remains constructive.
The AI disruption narrative continued its march through new sectors yesterday, hitting commercial real estate, trucking, and logistics with particular violence. The entire commercial real estate sector had one of its worst days since the financial crisis as investors suddenly questioned whether we will need that many offices in an AI augmented world. CH Robinson Worldwide and Landstar System each fell roughly 15%, the Russell 3000 Trucking Index tumbled 7%, and the Dow Jones Transportation Average dropped 4%. Even Big Tech was not spared with Nvidia falling 1.6%, Amazon 2.3%, Apple 5% for its worst single day loss since April 2025, and Palantir 4.8%.
Opening Bell
Futures are modestly lower this morning, with S&P 500 ($SPY ( ▲ 0.72% )) futures down 0.18%, Nasdaq ($QQQ ( ▲ 0.89% )) futures off 0.12%, and Dow ($DIA ( ▲ 0.47% )) futures declining 144 points. The cautious tone reflects positioning ahead of the inflation report rather than any new overnight developments.
In after-hours trading, Applied Materials jumped 13% after forecasting second-quarter revenue of $7.65 billion, well above the $7.01 billion estimate, driven by AI processor demand and memory shortages. Airbnb rose 4% on upbeat guidance calling for first-quarter revenue of $2.59-2.63 billion versus the $2.53 billion expected. Pinterest slipped 17% on weak fourth-quarter results and soft forward guidance.
The major averages are on pace for weekly losses, with the S&P 500 and Dow off more than 1% through Thursday's close and the Nasdaq tracking toward a 1.9% decline for the week.
The AI Contradiction
At some point we have to step back and truly see results before stripping market cap from companies based on headlines rather than fundamentals. You cannot simultaneously have an AI bubble where all the companies investing in AI are being punished AND have entire industries being torn down because of the threat of AI. These two narratives contradict each other, or there is a large gap between market perception and reality.
Yesterday's sell off following news that Algorhythm Holdings, a small AI driven logistics firm, developed a tool to help customers scale shipping volumes without additional hiring exemplifies the pattern. Algorhythm stock finished 29% higher while the entire sector dumped. Investors made the knee-jerk reaction to sell exposed stocks and ask questions later. Whether this is reasonable or an overreaction is unknowable at this point, but the volatility is real.
The market is trying to determine the winners and losers in AI and its becoming more discriminate. But the Dow is close to 50,000, the S&P 500 is close to 6,900. There is obviously some carnage underneath, but in general this is not an AI bubble. The markets are holding up nicely at the index level.
AI is improving at an exponential rate, and we could see this disruption cycle repeat more frequently. The key is being ready to identify good companies pulled down by sector wide selling and add them to the portfolio at attractive levels.
Inflation: The Day's Main Event
January's CPI is expected to show prices rose 0.3% since December, bringing the year over year figure to 2.5%. Stripping out energy and food, core is expected at 2.6%, which would be the lowest since March 2021. If accurate, this would bring the widely cited inflation gauge back to its May 2025 level, a month after President Trump enacted liberation day tariffs that many economists feared would send prices spiraling higher.
It is worth noting that CPI has come in below Wall Street consensus for the past three months. Goldman Sachs expects headline CPI to come in light at 2.4%, which could add to hopes that inflation is moderating. Goldman sees a 0.07 percentage point contribution to core inflation from tariffs, with upward pressure possible on clothing, recreation, household furnishings, and personal care.
Getting inflation back to 2.5% would be consistent with pre-pandemic conditions and around the 2017-19 average. With the fed funds rate currently targeted between 3.5-3.75%, well above pre-COVID levels, the Fed has considerable room to cut if the data cooperates. A dovish Fed is supportive of stocks, and this is why in my base case of a three-phase market, I see stocks exiting the year strongly.
Jobs Data: Better Than the Headlines Suggest
The January payroll report deserves more nuanced interpretation than it received. Yes, 2025 job growth was revised from 584,000 to just 181,000, the worst year for job creation since 2003 outside of recessions. But the news is actually much better right now.
The economy created 130,000 jobs in January, well above expectations for 65,000. The three month average is now running at 73,000, the highest since last April. Job creation plunged in mid 2025 amid tariff chaos and economic uncertainty, but it has picked up with positive growth in three straight months. With immigration stalled, the economy probably needs to create less than 50,000 jobs monthly to keep up with population growth.
Even more encouraging, the prime age employment-population ratio rose to 80.9%, matching the expansion peak from July 2024. More people in their prime working years are currently employed than at any point between mid 2001 and mid 2024. That is remarkable and should put to bed worries that AI is leading to broad job losses.
If AI were responsible for weak job growth, we would not be seeing unemployment rates for young workers fall. The 16-19 year-old unemployment rate peaked at 16.3% in November and has dropped to 13.6%. The 20-24 year-old rate peaked at 9.2% in September and is now 7.1%. The labor market weakness was about economic uncertainty, not technological displacement.
Earnings Spotlight
Coinbase posted a surprise quarterly loss of $666.7 million, its first loss since Q3 2023, as transaction revenue tumbled to $982.7 million from $1.56 billion a year earlier. The result confirms that the crypto volume weakness we saw in Robinhood's numbers is industry wide. Both companies are dealing with cyclical headwinds rather than structural deterioration.
Arista Networks forecast first quarter revenue of $2.6 billion, above the $2.45 billion estimate, betting on steady demand from data center expansion. This is the infrastructure buildout story continuing to play out.
Roku forecast annual revenue of $5.50 billion, ahead of the $5.34 billion estimate, as more customers shift to ad-based streaming. Platform revenue guidance of $4.89 billion represents 18% growth.
Anthropic raised $30 billion in its latest funding round, more than doubling the Claude chatbot maker's valuation to $380 billion and underscoring massive investor interest in the AI startup space despite public market volatility.
Corporate Developments
Goldman Sachs chief legal officer Kathy Ruemmler resigned after Justice Department documents showed she accepted gifts from Jeffrey Epstein and advised him on media inquiries regarding his crimes.
Converse, owned by Nike, is cutting corporate roles as CEO Elliott Hill tries to reestablish the company after losing market share to rivals.
Applied Materials agreed to a $252 million settlement for illegally exporting chipmaking equipment to China's SMIC, shipping ion implanters through South Korea on 56 occasions in 2021 and 2022.
Final Thought
We are in an extremely volatile period for markets, and historically the second half of February tends to be challenging for stocks, likely adding pressure. I have called all year for significant volatility alongside chances of a meaningful pullback. One thing to note: short interest on the Nasdaq is approaching levels that normally mark a bounce. While I see more downside risk from here, you saw how quickly sentiment reversed last week and it could shift again today with a light inflation read that reignites rate cut hopes.
This is an edgy market with no clear sense of direction. While I expect small caps and international to continue leading, it feels like the market needs mega-cap tech to bounce to challenge that 7,000 figure on the S&P 500. Remember, this market feels terrible but we remain in striking distance of all-time highs. This year has punished people in individual names rather than those owning the broad basket, which reinforces the diversification thesis I have emphasized throughout.
The contradiction at the heart of current price action will eventually resolve. Either AI delivers transformative value that justifies hyperscaler spending, or it does not. Either AI disrupts entire industries overnight, or the transition proves more gradual. Markets hate uncertainty, and we are swimming in it. But uncertainty creates opportunity for investors willing to distinguish signal from noise.
As always, feel free to reach out with questions about positioning for these evolving market dynamics.
Best regards,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.