S&P 500: -0.10% DOW: 2.5% NASDAQ: -1.87% 10-YR Yield: 4.217%
What Happened?
After another volatile week in the markets, investors can end it with a happy Friday! The week began with steep sell-offs in tech and software, but buyers stepped it out. The Dow Jones surged to a fresh all-time high, crossing 50,000, alongside a strong move higher in small-caps. This broader participation across the market signals renewed strength and suggests that a rotation may truly be underway, with value continuing to outperform growth.
We received positive ISM Manufacturing and Services data that affirmed the underlying economy’s strength. This shift was led by manufacturing finally flipping to expansionary territory and beating forecasts, indicating improved economic activity. Job opening data were less encouraging, however, as openings fell to their lowest level since the pandemic.
It was also a big week in terms of earnings, with Google and other tech giants reporting increased plans for AI spending. As we’ve learned, investors tend to pick and choose which of the Magnificent 7’s investment plans they favor, even when they’re all measured in hundreds of billions. Amazon felt the brunt of that scrutiny this week, as shares fell more than 13% following the announcement of its $200 billion capex plan for 2026.
The partial shutdown was resolved much more quickly than last year’s, after Congress reached a so-called compromise that effectively extended the deadline to make a final decision. The debate centers around funding for the Department of Homeland Security following backlash from recent events, with markets looking forward to a more permanent resolution.
Sell off in software prompted by agentic AI developments
- The S&P Software Industry Index is down nearly 20% YTD, with 7.75% of that decline occurring over the last five sessions
- New agentic AI announcements are raising fears that traditional software business models are at risk
The key takeaway – Software As A Service (SaaS) companies have been among the biggest winners, and most prolific innovators, of the modern technology era. Most of us interact with their products daily, at minimum catch a glimpse of those witty Salesforce commercials featuring Matthew McConaughey.
But despite SaaS being deeply embedded in our work lives (and our ad breaks), investors are increasingly worried that the painstaking workflows, processes, and data management these companies have so intentionally refined may soon be handled by AI agents instead of humans. Instead of using software to make a task easier to complete, you simply tell a speedy AI sidekick the outcome you want, and it handles the steps in between, turning one employee into the general of a superhuman productivity army.
In the worst case scenario for SaaS firms, their moats are breached by specialized AI agents trained for their exact functions, implementation hurdles shrink as AI gets better at messy data, and the per-seat pricing model that has driven software economics for decades becomes harder to defend when much fewer users are needed. If one human can supervise ten agents, why pay for ten licenses? The question now is whether investors are correctly pricing in the magnitude of this disruption or simply overreacting to the first credible agentic demos. Either way, the burden is on SaaS companies to convince markets that AI will be additive to their business models, not the tool that renders them irrelevant.
ISM Manufacturing and Services signal strong
- Manufacturing showed its strongest signal of improvement in over a year reaching expansionary territory
- Services continued to provide stability and support increasing for the 19th consecutive month
- Doubts linger around how strong the metrics are with January being a busy month and ongoing tariff pressures
The key takeaway – The Institute for Supply Management updated its manufacturing and services indexes this week. After 12 consecutive contractionary months, manufacturing jumped to 52.6, firmly in expansionary territory. This marked the highest reading since August of 2022 and beat expectations of 48.5. This improvement was driven by a rebound in new orders, with five of the six largest manufacturing industries participating. Markets generally view a sustained move back above 50 as an early signal that economic momentum may be stabilizing. While this is a positive signal towards greater economic growth, there is some skepticism around how strong the numbers truly are. With January typically being a reorder month following the holidays and ongoing tariff pressures still lingering, this increase could prove temporary. One area showing less strength within manufacturing is employment, which remained in contractionary territory. With the labor market in a slow spot, the impact continues to be felt across sectors.
ISM services also showed signs of continued improvement, increasing once again at the fastest rate since October of 2024 to a PMI of 53.8 . Factors contributing to this growth included a pickup in business activity, as well as gains in new orders and employment. With services accounting for roughly two-thirds of the US economy, ongoing strength represents a solid and healthy backdrop despite recent setbacks. While services face similar scrutiny to manufacturing, both areas are working through uncertainty and figure out how to position themselves to reduce the risk of margin compression without having to significantly increase pricing.
From Around the Watercooler
The Road to Dow 50000 Was Perilous. What’s Next Could be Rockier
Justice Department Casts Wide Net on Netflix’s Business Practices in Merger Probe
Bitcoin Rebounds back above $70,000 after nearly Breaking Below $60,000 a day ago
Iran Refuses to End Nuclear Enrichment in Talks With U.S.
Disclousure:
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