The market experienced a stark divergence last week, with industrial stocks soaring while financial and technology sectors retreated under the shadow of escalating artificial intelligence concerns. A confluence of economic data further complicated the investment landscape. Despite a modest Friday rebound in the S&P 500, buoyed by an inflation report that strengthened the case for future interest rate reductions, the index ultimately finished the week in the red. Investors remain unconvinced about the likelihood of a Federal Reserve rate cut in March.
The S&P 500 registered a weekly loss of 1.4%, and the tech-centric Nasdaq saw a decline of 2%. The Dow Jones Industrial Average, however, presented a different narrative. While it ended the week down 1.2%, it achieved a record closing high on Tuesday. Notably, Dow component Honeywell was a significant weekly performer, contrasting with Apple, which was among the laggards. The market will be watching to see if Friday’s tentative gains, following several sessions of losses, can carry momentum into the new week. Here are three key factors that shaped the stock market’s performance over the past five trading days.
**AI Fears Cast a Long Shadow**
Financial institutions like Wells Fargo and Capital One faced significant selling pressure last week amid concerns that a new AI-driven tax planning feature could disrupt the wealth management industry. This sell-off intensified on Tuesday following an announcement from wealth platform Altruist and persisted for two subsequent sessions. The financial sector found some footing on Friday after Baird upgraded Wells Fargo to a hold-equivalent rating from a sell, with analysts now viewing the bank’s valuation as more attractive after the pullback. Nevertheless, Wells Fargo and Capital One recorded weekly declines of over 7.4% and nearly 7%, respectively. While the immediate threat to wealth management is a point of observation, it has not yet fundamentally altered the long-term investment thesis.
The downturn extended to major technology players. Alphabet, technically classified within the communication services sector, was a significant decliner, down more than 5% for the week. Investor apprehension stemmed from the company’s increased investment in AI, despite a strong earnings report released just weeks prior. The investment thesis for Alphabet remains unchanged, prompting further share purchases during the dip.
Conversely, information technology sector stocks, which had been heavily impacted the previous week due to fears of AI disrupting their business models, showed signs of stabilization. Salesforce experienced a modest decline of less than 1%, while CrowdStrike and Palo Alto Networks recovered 8.6% and 4.8%, respectively. The distinction between cybersecurity and software-as-a-service (SaaS) is critical, given the indispensable nature of cybersecurity solutions in today’s complex threat landscape. This understanding supported further investment in CrowdStrike. With Palo Alto Networks slated to report earnings this week, market participants will be keen to observe if cybersecurity stocks can continue to decouple from the performance of SaaS companies.
**The Industrial and Consumer Staples Rally**
The strong performance of industrial and cyclical stocks continued, exemplified by significant gains in companies such as Eaton, Honeywell, Dover, DuPont, and GE Vernova. This trend is part of what analysts are terming an “Olympic-sized rally” for these sectors, potentially driven by a recalibration of market focus away from Big Tech or a growing appreciation for companies closely tied to a robust economy. Price targets for Eaton and GE Vernova were raised accordingly. Despite a significant jump of over 4% last week and a year-to-date gain of 22%, some profits were realized in Eaton, though the long-term bullish outlook for the power management solutions provider, whose products support energy-intensive data centers, remains intact.
Consumer staples also demonstrated resilience, outperforming the broader market year-to-date. Procter & Gamble, a standout in this sector, has seen substantial gains in 2026. The strategic acquisition of P&G shares during a period of underperformance last year has proven prescient, serving as a hedge against concentrated technology holdings. Recognizing the rapid ascent of P&G, some profits were taken, positioning for a more measured approach moving forward.
**Economic Signals Point to a Fed Pause**
Last week’s economic data reinforced the market’s expectation that the Federal Reserve will maintain current interest rates at its March meeting. The delayed January jobs report indicated stronger-than-expected job growth, while the Consumer Price Index (CPI) revealed a more moderate increase in the cost of goods and services than anticipated. These dual signals of a strong labor market and easing inflation are favorable for the Fed’s objectives of fostering employment and maintaining price stability. While a March pause appears likely, the cooler CPI reading has increased expectations for rate cuts later in the year, with the market currently pricing in two to three reductions.
The performance of companies sensitive to interest rate movements, such as Home Depot, is closely linked to the Fed’s policy decisions. Home improvement retailers, reliant on a healthy housing market, have faced headwinds from elevated mortgage rates and home prices. With a potential shift in Federal Reserve leadership on the horizon, market participants will be closely monitoring policy implications, particularly concerning the Fed’s approach to borrowing costs and their impact on interest-sensitive sectors of the economy.
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