Good morning investors,
The Dow Jones Industrial Average closed above 50,000 for the first time in history on Friday, punctuating what was otherwise a brutal week for technology stocks with a psychological milestone that underscores the resilience of the broader market. Friday's dramatic 2% rally across major indices rescued what had been shaping up as the worst week for software stocks since the pandemic, and while the scars from the recent sell off remain visible, the market's ability to stage such a powerful reversal speaks to underlying strength that bears have consistently underestimated.
I want to be direct about where we stand: the violent rotation out of software and the cryptocurrency crash that saw Bitcoin plunge below $65,000 mid week before recovering above $70,000 are not signals of a bull market ending. They are signals of a bull market evolving. Capital is repricing risk, demanding proof of defensibility, and rotating toward areas where uncertainty is lower. This is healthy, even if it feels painful in the moment.
Opening Bell
Futures point to a modestly softer open this morning, with S&P 500 ($SPY ( ▲ 0.07% )) futures down 0.2%, Nasdaq 100 ($QQQ ( ▲ 0.21% )) futures off 0.3%, and Dow ($DIA ( ▲ 0.12% )) futures dipping about 37 points. The cautious tone follows a week where the S&P 500 managed to slip just 0.1% despite the tech carnage, while the Nasdaq Composite dropped 1.84% and logged its fourth consecutive losing week. In contrast, the Dow gained 2.5% and the Russell 2000 ($IWM ( ▲ 1.32% )) advanced 2.17%, with the Equal-Weight S&P 500 ($RSP ( ▲ 1.04% )) hitting new all time highs, reinforcing the rotation theme that has defined early 2026.
Japanese markets are providing an optimistic backdrop after Prime Minister Sanae Takaichi secured a landmark election victory over the weekend. The Nikkei 225 surged 3.9% to close at a record 56,363, breaking above 57,000 intraday for the first time. Takaichi's decisive two-thirds supermajority signals continuity of growth focused economic policies in the Abenomics tradition, which markets are interpreting as supportive for equities even as a weaker yen becomes part of that equation.
Market Framework: The Breadth Story That Matters
Here is what I want readers to focus on: the equal-weight S&P 500 closed at a record high on Friday alongside the Dow. That means stocks, on average, are going up even without Big Tech doing the heavy lifting. This is not what happens when bull markets are about to end. History shows that narrowing breadth and deteriorating participation typically precede major market tops. We are witnessing the opposite.
The Magnificent Seven have lagged to start the year, and I have been underweight this group since July 2025. That positioning has worked. The stronger returns have come from leaning into the equal-weight S&P 500, small and mid cap stocks, and international equities. Capital is migrating toward areas where valuations are more reasonable, earnings sensitivity to growth is higher, and expectations are less stretched.
Small caps remain my top asset class pick for 2026. When breadth broadens this decisively while economic data remains firm, the historical playbook favors continued rotation rather than collapse.
Software Sector: Valuation Correction, Not AI Failure
The iShares Software ETF finished the week down 8.7% and is now 23% lower for the year. After an eight day losing streak, buyers finally stepped back into the space on Friday, but the broader tech complex remains range bound until it can decisively break above the December highs.
I wrote extensively this weekend about the fundamental contradiction the market is currently pricing. Either artificial intelligence meaningfully disrupts traditional software economics, or it does not. Both narratives cannot be true simultaneously, yet equity pricing implies they are. The market is treating AI as an existential threat to software while simultaneously dismissing AI as a bubble that has not delivered real economic value. That inconsistency sits at the heart of current volatility.
What we witnessed last week was indiscriminate selling that flattened distinctions between businesses with genuine AI leverage and those whose products are plausibly threatened by it. This is typical of late stage rotations when valuation compression becomes the dominant force and differentiation temporarily disappears. It does not mean prices cannot go lower. It does mean that price alone is not evidence the risk has passed.
For my complete analysis on why this is a valuation correction rather than an AI bubble bursting, including why certain digital advertising and cloud infrastructure names are being mispriced alongside genuinely vulnerable software businesses, read my full breakdown here: https://open.substack.com/pub/dansheehan9/p/this-isnt-an-ai-bubble-its-a-valuation
Crypto Framework: Capitulation Creates Opportunity
Bitcoin's mid week plunge to $65,000 wiped out all of its gains since November and sent sentiment to levels I have not seen in a long time. Strategy, formerly MicroStrategy, reported a staggering $17.4 billion operating loss that rattled confidence, while Robinhood, Coinbase, and other crypto exposed names logged double-digit declines before Friday's recovery.
I continue to believe in Bitcoin longer term, but calling a bottom anywhere here is difficult. What I can say is that sentiment this bearish has historically been the opportune time to accumulate rather than capitulate. The CLARITY Act, which would establish a firm regulatory framework for digital assets, passed the House in July 2025 and is proceeding through Senate committee deliberations. Its passage would be arguably the largest catalyst for crypto, though market based expectations for near-term progress remain muted.
Bitcoin recovering above $70,000 on Friday suggests the leverage washout may have run its course, at least temporarily. The structural bull case built on limited supply, institutional adoption through ETFs, and potential government reserve considerations remains intact beneath the noise.
I like a rebound in Coinbase.
Economic Calendar: Jobs and Inflation Take Center Stage
This week brings the delayed January employment report on Wednesday and CPI data on Friday, both postponed by the brief government shutdown that ended February 3rd. Economists expect 70,000 nonfarm payrolls were created last month with unemployment holding at 4.4%, though last week's ADP print of just 22,000 private sector jobs and JOLTS data showing job openings at their lowest level since 2020 suggest downside risk to that consensus.
Friday's CPI is expected to show prices rose 0.3% month over month and 2.5% year over year. This is the data that will shape Fed expectations heading into the March meeting. I remain constructive on the trajectory of monetary policy, believing we are in the late stages of the inflation fight where the path toward the 2% target remains intact even if the journey proves bumpy.
Today's calendar is light, with the New York Fed's one year inflation expectation survey and Fed Governors Waller and Miran speaking later in the session. Earnings include Apollo Global Management, and ON Semiconductor.
Corporate Developments
The hyperscaler capital expenditure story continues to evolve. With Amazon, Google, Meta, and Microsoft committing to some $650 billion in AI spending during recent earnings calls, the scale of investment underway is extraordinary. TotalEnergies signing two long term deals to supply 1 gigawatt of solar capacity to Google's Texas data centers underscores how AI infrastructure demand is creating cascading opportunities across the energy complex.
FedEx's $9.2 billion acquisition of parcel locker company InPost expands its European footprint and highlights ongoing M&A activity despite market volatility. Goldman Sachs expects US IPO proceeds to quadruple to a record $160 billion in 2026, with potential listings from SpaceX, OpenAI, and Anthropic on the horizon.
Kroger shares are rising in premarket trading after reports that former Walmart executive Greg Foran will become CEO, while Hims & Hers reversed course on its compounded GLP-1 pill following FDA pressure. Both stories reflect the regulatory and competitive crosscurrents that continue to create winners and losers beneath the surface.
Sentiment Check
Sentiment has gotten extremely bearish, which is not normally what you see at the top of a bull market. The way people reacted last week to a 3-4% drawdown from highs was concerning. I worry that some retail investors may hit panic mode again if we see renewed weakness, though I do not believe that represents the majority. Market dynamics have changed due to the resilience of the retail trader, but some of the commentary I heard last week showed fragility that did not exist when we pulled back in April.
Contrarian indicators suggest this bearishness, occurring with indices still near all time highs, is more likely a sentiment washout than the beginning of something worse. The investors chasing cheaper, smaller companies while reassessing tech risk is rational portfolio repositioning, not flight from equities altogether.
Final Thought
The global bull market continues. Yes, software is in a drawdown. Yes, crypto sentiment is washed. Yes, the Magnificent Seven have lagged. But the Dow just hit 50,000, equal-weight indices are at records, Japanese stocks are surging to new highs, and economic data remains supportive of continued expansion.
I view the current tension within mega cap technology as a near-term adjustment, not a structural problem. These companies ultimately sell into a broad, functioning economy, and that economy remains strong. The continued outperformance of equal-weight indices, smaller companies, and international markets reinforces that point.
For broader markets to make sustainable progress, renewed tech participation will eventually be essential. But the fact that we can stage dramatic rallies and print new highs in the Dow without that participation happening yet tells you something important about the depth of the current advance. Use volatility to position for the themes that continue working: broadening breadth, small cap outperformance, AI infrastructure beneficiaries, and international diversification.
As always, feel free to reach out with questions about positioning for these evolving market dynamics.
Best regards,
Dan Sheehan
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.