Stocks continue to post losses for a third consecutive session as excessive liquidation of exposures to AI, cryptocurrencies and metals dampened investors' risk appetite.
Markets fall for third day in a row. Archive photo
US stocks led the decline on the stock market, with technology, once again, in the center of attention, while Bitcoin registered a sharp decline amid accelerating sales caused by liquidity, according to Radu Puiu, XTB Romania financial analyst.
According to him, the overall image of the market has deteriorated considerably. Nine of the 11 S&P 500 sectors posted declines, a sign that the pressure is no longer confined to a single factor or theme. The Nasdaq fell 1.6%, the S&P 500 lost 1.2% and the Dow Jones Industrial Average declined nearly 600 points.
AI is under review
In his view, investors' attention is decisively shifting from AI's revenue potential to capital intensity and margin risk. Recent guidance from Amazon and Alphabet has reinforced concerns that AI investment cycles may require much higher spending than markets anticipate.
Amazon's investment plan, estimated at around 200 billion dollars by 2026, together with Alphabet's high spending prospects, has raised questions about the return on capital invested in the entire sector, explains Radu Puiu.
“This revaluation extends beyond large-cap companies to software companies, where fears are growing that new AI models could weaken pricing power and squeeze margins. The result has been forced selling in some areas as investors cut exposure to deals that had become crowded and highly sensitive to valuation assumptions“, the analyst believes.
Markets react with high volatility
On the other hand, he argues, US labor force data added a second source of pressure. Initial jobless claims rose to a better-than-expected 231,000, while job announcements hit their highest level since January 2009. While the numbers don't yet signal a recession, they do point to increased caution among employers.
With the release of nonfarm payrolls delayed until February 11, weaker labor market indicators are likely to weigh heavily on market prices in the near term. If hiring slows further, risks increase in terms of wage growth, consumer spending and earnings dynamics outside the technology sector, a potential factor that could lead to a widespread decline in valuations, says financial analyst XTB Romania.
“As concerns about economic growth resurfaced, markets began to forecast faster easing of the Federal Reserve's monetary policy. Compared to yesterday's session, the probability of a 25 basis point interest rate cut at the upcoming meeting in March increased to 20.7%, even if the rate hold remains the base case scenario.
It is important to note that this change reflects the high risks of a slowdown in economic growth rather than the improvement in inflation dynamics. If future inflation and employment data deteriorate, expectations of earlier cuts could gain ground, supporting duration-sensitive assets and strengthening pressure on cyclical exposures”the XTB analysis shows.
What's next for the stock markets
From a positioning perspective, markets are moving towards defensive companies with strong cash flows, amid weakening confidence in the “soft landing”, the analyst points out, adding that in technology, valuation risk is increasing, and companies in the AI area may be penalized again if pressure on prices and large investments continues.
In his opinion, sensitivity to macro data is heightened, and indicators regarding the labor market and inflation may move the market more strongly than usual. The tension is quickly spreading globally, and Asia's reaction shows how quickly US risk aversion is being transmitted.
If the narrative “Fed tapering earlier“strengthens, financial conditions could ease, but this would confirm that growth concerns outweigh overvaluation as the dominant market risk. Investors should expect high volatility as markets recalibrate both earnings expectations and policy assumptions in the coming weeks, adds Radu Puiu, financial analyst at XTB Romania.
