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Dow industrials hit 50,000 on Friday as stocks rebound

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Software swoon draws questions about AI's impact

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Jobs report due on Wednesday, CPI on Friday in busy data

week

By Lewis Krauskopf

NEW YORK, Feb 6 (Reuters) - An artificial

intelligence-driven shakeout in the heavyweight technology

sector is set to keep stock investors on edge in the coming week

while a barrage of data could shift focus to the health of the

economy.

A deepening rout among software stocks commanded Wall Street's

attention this week, as investors worried about the extent to

which AI would upend business models throughout the industry.

Further weakness ‌in the tech sector, which holds massive weight

in the major U.S. equity indexes, dragged on the market for much

of the week.

On Friday, stocks staged a strong rebound, with the Dow

Jones Industrial Average crossing 50,000 for the first

time, led ​by a surge in shares of semiconductor companies.

Below the surface, investors have been encouraged about a

rotation from tech to other parts of the market that

underperformed for ‍most of the bull market that began more than

three years ago. While tech has struggled, energy, consumer

staples and industrials ⁠have shined so far this year.

"Rotation is ⁠the dominant theme this year and continues to

be as we see these old-economy sectors and stocks really get

some love," said Angelo Kourkafas, senior global investment

strategist at Edward Jones. "At the same time, the bar of

expectations seems ‌to be so high for tech that no matter what

companies report, it seems like the ​natural inclination from

investors is to take some profits."

Although the tech sector bounced back on Friday,

the group has slid 9% since it peaked for the year in late

October.

Over that period, most of the other 11 S&P 500 sectors have

posted gains, including four with double-digit percentage rises.

But ⁠the benchmark S&P 500 has managed to eke out only

a slim increase in ‍that time. With the ​tech sector still

accounting for about one-third of the weight in the S&P 500,

investors fear the index will struggle if tech continues to

falter.

"A market can absorb a prolonged rotation with large sector

winners without obvious index-level stress for quite some time,"

Jim Reid, head of macro and thematic research at Deutsche ‍Bank,

said in a note. "However, the longer and deeper the selloff in a

dominant sector becomes, the harder it can be for the broader

index to withstand the drag."

WHERE NEXT FOR SINKING SOFTWARE?

Stress is centering on software, with the S&P 500 software

and services index tumbling 15% in a little over a

week. Fears about AI disruption were compounded by disappointing

earnings reports including from software giant Microsoft ( MSFT )

.

The fallout for software underscores how investors are

increasingly trying to determine winners and losers from AI.

"Before, it was 'AI lifted all ships,'" said Matthew Miskin,

co-chief investment strategist at Manulife John Hancock

Investments. "Now, there are concerns that this massive

acceleration in the technology space could cause other

businesses to not see the kind of ​growth rate they ‍did before."

The coming week will feature reports in the software

industry from AppLovin ( APP ) and Datadog ( DDOG ). Results are

also due from high-profile companies including Coca-Cola

, Cisco Systems ( CSCO ) and McDonald's as

fourth-quarter earnings season winds down.

EMPLOYMENT, INFLATION DATA ON TAP

Monthly reports on employment and consumer prices will be

released after both were pushed back slightly ​due to the

recently ended three-day government shutdown.

January's nonfarm payrolls report, out on Wednesday, is expected

to show an increase of 70,000 jobs, according to a Reuters poll.

Investors are trying to assess whether weakening in the labor

market has tapered off. While the Federal Reserve cited

stabilization in the jobs market as it held interest rates

steady last month, a survey on Thursday showed layoffs announced

by U.S. employers surged in January.

Meanwhile, inflation remains "somewhat elevated" in the view

of the Fed, with the January consumer price index due on Friday

offering the latest insight into such trends.

With the Fed describing diminished risks to both inflation and

employment, markets are expecting the central bank to hold off

on further interest rate cuts until its June meeting. By that

point, President Donald Trump's newly nominated Fed chair, ​Kevin

Warsh, could be in charge.

After the central bank cut rates at the end of last year,

Fed fund futures have continued to price in roughly two further

quarter-percentage-point cuts by December, expectations that

generally held in the wake of the announcement of Warsh's

nomination late last month.

"Rate expectations have been remarkably stable over the last

couple of weeks," Kourkafas said. "We'll see if any either

weakness in the labor market data or any surprising cool-down ‍in

inflation accelerates a bit the timeline for when the market

thinks the next rate cut may be delivered."