3 Major Stock Market Drivers from Last Week

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A potent market rebound on Friday offered a much-needed boost, but it wasn’t enough to entirely offset the week’s earlier turbulence. After several sessions marked by significant selling pressure, the technology sector staged a remarkable comeback, with the Nasdaq Composite surging over 2% on the final trading day. Leading the charge were semiconductor giants Nvidia and Broadcom, which saw impressive gains of 7.8% and 7.2%, respectively. The broader S&P 500 also participated in the rally, climbing nearly 2%.

Despite this late-week surge, both the Nasdaq and the S&P 500 ultimately ended the week in negative territory, with the Nasdaq shedding 1.8% and the S&P 500 experiencing a modest 0.1% decline.

In stark contrast, the Dow Jones Industrial Average carved out a different narrative, benefiting from a clear rotation out of high-growth software and technology stocks and into perceived value areas such as financials and industrials. The 30-stock benchmark experienced a dramatic ascent on Friday, adding over 1,200 points and closing at an all-time high. For the week, the Dow registered a robust 2.5% gain.

This divergence highlights a key market dynamic: the ongoing tension between growth and value investing strategies, particularly in the context of evolving technological landscapes and economic outlooks.

**Key Market Drivers from the Past Week:**

1. **Capital Expenditure Announcements Fuel AI Debate:** A significant theme dominating investor attention was capital expenditure (capex) plans, particularly from the hyperscale cloud providers who are viewed as central to the artificial intelligence (AI) trade due to their substantial investments in this nascent technology.

Alphabet and Amazon both unveiled ambitious increases in their capital spending for the year, signaling a commitment to expanding their data center infrastructure and AI capabilities. However, investor reactions diverged sharply. Google’s parent company, Alphabet, reported a stellar fourth quarter and projected that its 2026 capital expenditures could more than double the previous year’s outlay. Investors largely embraced this forward-looking investment, with Alphabet’s shares experiencing only a modest 0.5% dip on Thursday, a performance significantly outperforming the Nasdaq’s 1.5% decline that same day.

Amazon, on the other hand, faced a steeper sell-off, with its stock tumbling 5.5% on Friday following its earnings release. While the e-commerce and cloud giant’s results missed profit forecasts for the current quarter, the overall performance for the year remained solid. The market’s response underscores the sensitivity investors have to forward guidance and the execution risks associated with massive infrastructure build-outs, even in a sector as promising as AI. The sheer scale of these investments raises questions about return on investment timelines and the competitive dynamics within the cloud computing space.

2. **Software Stocks Face AI-Induced Headwinds:** The software sector experienced considerable pressure early in the week, fueled by anxieties that AI advancements could erode the market share of traditional enterprise software-as-a-service (SaaS) companies. While concerns about AI’s impact have been building for months, the sell-off intensified following Anthropic’s release of a new automation tool specifically designed for legal workflows.

This development highlights a critical inflection point for the software industry. While AI presents a clear threat to certain business models, the recent market correction appears to have indiscriminately punished both companies directly in the crosshairs and those with proven resilience and strong market positions, including leading cybersecurity firms. Ironically, AI should theoretically serve as a significant tailwind for many of these businesses, enhancing their product offerings and expanding their addressable markets. The aggressive pricing of cybersecurity solutions, for instance, often reflects the growing sophistication of threats, which AI is also augmenting. The market’s overreaction presented opportunities, such as accumulating positions in companies like CrowdStrike, where underlying demand for its cybersecurity solutions remains robust and is likely to be further amplified by the evolving threat landscape driven by AI.

3. **Sector Rotation Creates Rebalancing Opportunities:** The pronounced lack of investor enthusiasm for technology stocks precipitated a significant capital rotation into other market segments, often those that had been overlooked. This shift provided a strategic window to realize gains and bolster cash reserves.

For instance, positions in two Dow Jones components, Home Depot and Honeywell, were trimmed after delivering double-digit returns. Similarly, significant profits were booked on DuPont, whose shares rallied over 6% last week as capital flowed into value and industrial economy names. For the year, DuPont has seen its stock appreciate by more than 16%.

The rotation also allowed for the strategic divestment of underperforming assets. Texas Roadhouse, a restaurant stock that had previously lagged, was partially sold on Monday. This move, the second trim of the year, followed a 15% year-to-date gain. The decision was not driven by a slowdown in the company’s operational performance but rather by a strategic recalibration of exposure in light of persistent concerns surrounding the timing of beef inflation’s abatement. This demonstrates a disciplined approach to portfolio management, where tactical adjustments are made based on macroeconomic factors and sector-specific headwinds, even for companies with fundamentally sound businesses.