Good morning investors,
The AI transition's biggest question got a new provisional answer yesterday, and it buoyed stocks. Anthropic, which has been throwing around considerable weight with Claude recently, announced not only new capabilities but, most critically, partnerships with incumbent software players. Salesforce, FactSet, and DocuSign, which had been hammered recently, all jumped on the news. The pivot back to cooperation rather than competition put the wind back in the sails. The S&P 500 and Dow rose 0.8% while the Nasdaq gained 1.0%.
I published one of the biggest deep dives of my career yesterday in response to the Citrini Research piece that sent financial Twitter into a spiral. That fictional 2028 macro memo, with the S&P down 38% and unemployment at 10.2%, was masterfully constructed fear-mongering. Within 48 hours, commentators who were bullish last week were writing doom threads. I wanted to make the case, with data, with history, and with the investment positioning we have been building for two years, that the most underpriced scenario in the market today is not catastrophe. It is abundance.
Read the full piece here: The Bull Case for AI Abundance
Opening Bell
Futures are slightly higher this morning ahead of Nvidia's ($NVDA ( ▼ 4.58% )) earnings after the bell. Dow ($DIA ( ▼ 0.03% )) futures are up 54 points or 0.1%, S&P 500 ($SPY ( ▼ 0.23% )) futures are adding 0.1%, and Nasdaq 100 ($QQQ ( ▼ 0.65% )) futures are gaining 0.2%. The positioning reflects cautious optimism after yesterday's relief rally, though all eyes remain on Nvidia's results as a referendum on the AI economy.
Semiconductors hit a new all time high yesterday, not just on an absolute basis but also relative to the S&P 500. AMD jumped 9% after Meta announced a massive multiyear deal involving up to 6 gigawatts of AI chips in exchange for approximately 160 million AMD shares, roughly 10% of the company. The iShares Software ETF added 1.9%, though it remains down more than 25% this year.
Today's earnings calendar features Nvidia and Salesforce as the headliners after the close. We also hear from Lowe's, TJX Companies, HSBC, Synopsys, Snowflake, Paramount Skydance, and Circle Internet Group. Mortgage data showed rates fell to 6.09%, the lowest since September 2022, though purchase applications dropped 5% as economic uncertainty weighs on homebuyers.
Nvidia: The Main Event
Nvidia reports after the bell today as the only Magnificent Seven stock up more than 1% to start the year. While its mega-cap peers have succumbed to the software and AI sell off, Nvidia remains on solid footing. This divergence makes today's results even more high stakes. The market will read Nvidia's earnings as a referendum on the entire AI economy.
Nvidia has made a habit of crushing estimates that predates ChatGPT. The company has beat revenue estimates for 27 consecutive quarters and surpassed earnings estimates for 12 quarters in a row. Even though shares remain 9.1% below record highs, the relative strength against the rest of the Magnificent Seven is a testament to longstanding dominance. Microsoft, for context, has declined 29% from its highs.
Wall Street expects revenue of $65.6-65.7 billion and EPS of $1.50-1.52. A meaningful beat could juice optimism across AI exposed equities, perhaps enough for software, financials, and real estate to shake off recent negative sentiment. But any hint of moderating demand could stoke AI fears further, particularly during a stretch where Nvidia looks like the lone Big Tech stock still climbing.
Options traders are pricing Nvidia's smallest post earnings swing in three years at about 5.6% in either direction. The relative calm in the options market suggests either complacency or confidence that the results will not dramatically alter the narrative.
Anthropic Spares the Software Industry
There were even more reasons to be bearish on software theoretically. Anthropic unveiled a host of new enterprise capabilities for Claude, including tools designed for specific departments within organizations, highlighting how entire professions are exposed to new automation threats.
But Claude's announcement included partnerships with many of the companies deemed most disruptable. Salesforce and DocuSign have been given quarter by what might be the AI frontrunner. Anthropic has clearly decided it is more profitable to join forces and mount a corporate charm offensive rather than simply undercut incumbents.
This is exactly what I wrote about yesterday in my deep dive. SaaS is a delivery mechanism, not the value itself. The companies with deep data moats, mission critical workflows, and genuine switching costs are not being disrupted by AI. They are being empowered by it. The framework for distinguishing winners from losers is straightforward: Does this company own proprietary data that AI makes more valuable? Is this company becoming an AI delivery layer rather than being replaced by one? Does this company have switching costs rooted in workflow integration and data lock-in?
The selling in software has been indiscriminate to a point where it has gotten irrational. There is room for correction upward in some of these names. Salesforce and Snowflake report today, and their results will test whether the AI fears have emerged in the financial statements yet.
The Financial Sector Divergence
Large-cap financials, represented by XLF, just closed at their weakest relative level versus SPY since 2020. On a relative strength basis, large-cap financials are underperforming the broader market at a five year extreme.
But here is the interesting divergence inside the sector: small-cap financials recently printed new multi-year highs while large-cap financials are trading at fresh eight-month lows. Same sector, opposite behavior.
In prior cycles, sustained bull markets in the US have typically included participation from banks, brokers, and asset managers. When financials lag materially, especially on a relative basis, it has often preceded wider market stress rather than followed it. The interpretation is conditional, not predictive. If the relative weakness reverses quickly, it can be classified as sector rotation within a healthy bull market. If it persists, it would historically align with tightening liquidity or deteriorating credit conditions.
This is worth monitoring but not yet alarming. The small-cap financial strength suggests the rotation theme we have been writing about continues to work, even as large-cap financials struggle with AI disruption fears around their software heavy businesses.
AMD's Meta Deal: AI Demand Confirmed
Meta agreed to buy as much as 6 gigawatts worth of AI chips from AMD in exchange for upwards of 160 million shares of AMD common stock, roughly 10% of the company, contingent on AMD hitting key milestones. The deal highlights the urgency and scale of the AI buildout and the fierce competition to supply hardware to AI tool providers.
This represents AMD's attempts to challenge Nvidia's dominance. While Nvidia controls roughly 90% of the AI chip market, Meta's willingness to make substantial commitments to AMD validates the second source thesis. Hyperscalers want optionality, and AMD is positioning to capture that demand.
The deal also exemplifies what critics call circular financing, where companies invest in their customers or suppliers who use the proceeds to buy more products. Different mechanisms and money flows, but the general concept has drawn scrutiny for creating corporate dependency loops and potentially fueling an AI bubble. Whether this is a bubble or rational capacity building remains the central investment question of our era.
Warner Bros. Reopens Door to Paramount
Warner Bros. Discovery opened the door to Paramount Skydance after the rival bidder raised its offer to $31 per share. The Netflix merger agreement remains in effect, but Paramount is pushing for a last minute agreement that would force WBD to walk away from that deal.
If the revised offer is attractive enough for WBD to accept, Netflix would have the ability to respond with a matching bid. Paramount Skydance reports after the close today, and any commentary on the WBD situation will be closely watched. The media consolidation saga continues with no clear resolution in sight.
Housing: Rates Down, Demand Flat
Mortgage rates dropped to 6.09% last week, the lowest since September 2022. Refinancing applications increased 4% and are up 150% year over year. But purchase applications dropped 5% for the week despite the lower rates.
This disconnect tells us something important about consumer psychology right now. Lower rates are improving affordability mathematically, but economic uncertainty is weighing heavily on the decision to make the largest purchase of most people's lives. Home prices remain slightly higher than a year ago, and consumers are telling us through their behavior that they need more than just better rates to pull the trigger.
Final Thought
The fear thesis that dominated last week rests on a single premise: AI displaces white-collar labor at a pace that exceeds the economy's ability to absorb displaced workers, causing a demand collapse that feeds back into further displacement. It is a coherent model. But it requires a very specific set of assumptions to all be true simultaneously, and those assumptions are already being challenged by the data.
US labor productivity accelerated in Q3 2025 to its strongest pace in two years. We are not in a world of collapsing output. We are in a world of expanding output per worker. Every major productivity wave in modern economic history produced a transitional period of disruption followed by an expansion of economic participation that was broader and deeper than what preceded it.
The investors who allowed a fictional 2028 headline to dictate their February 2026 positioning have made a category error. The most underpriced possibility in the market today is not dystopia. It is abundance. And abundance, when it arrives, does not look like a slow melt. It looks like a repricing, a violent, messy, opportunity laden repricing that punishes the passive and rewards the disciplined.
We are in that repricing right now. Use Nvidia's results today, whatever they show, to continue positioning in the themes that are working: small caps, international diversification, cybersecurity at reset valuations, and selectively adding quality tech names where the risk-reward has become compelling.
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.