The US stock market experienced big swings this week, and investors are worried: Is the US economy really strong? Has AI become a bearish factor? Are safe-haven assets being turned into risky assets?

U.S. stocks experienced intense volatility this week, revealing cracks in the market that are becoming increasingly apparent.

Earlier this week, market capitalization temporarily evaporated by over $1.5 trillion, forcing traders to reconsider several previously taken-for-granted assumptions: Can the U.S. economy sustain another year of double-digit growth? Will the efficiency gains promised by AI end up squeezing out existing companies? Has retail trading enthusiasm turned some “safe-haven” assets into high-volatility instruments?

This turmoil isn’t limited to software stocks. Small caps, precious metal miners, digital asset-related companies, and professional service firms all showed signs of weakness within the same week. Among them, the software sector’s swings were the most alarming, with momentum stocks led by large tech giants experiencing their worst single-day decline since the pandemic.

Uncertainty continues to spread outward. Mike Dickson, Head of Research and Quantitative Strategies at Horizon Investments, said: “When investors get nervous, the places in the global markets with the highest valuations and most crowded positions tend to be the first to hurt.” Even as a rebound followed, he warned that such “big drops followed by quick recoveries” often occur when pressure has not yet been relieved.

Thomas Thornton, founder of Hedge Fund Telemetry LLC, stated:

There are pitfalls everywhere in the market, and some are turning into traps for specific assets and sectors.

Small Caps Hit Double Blow

At the start of the year, investors shifted from overvalued tech stocks to companies benefiting from economic recovery and falling interest rates, with small caps being the main target. This bet soured over the past week, partly because investors nearly sold off all their holdings.

The main concern stems from three sets of labor market data indicating worrying weakness in the U.S. economy. This softness particularly impacts small caps, which rely heavily on domestic demand, and with AI disrupting employment and business operations, small financial and tech firms are more vulnerable to upheaval. The Russell 2000 index’s 7.6% gain since the beginning of the year now seems overly optimistic.

“Equities may be sensing increasing pressure on consumers as labor market data continues to cool,” said Cameron Dawson, Chief Investment Officer at NewEdge Wealth. An unexpectedly strong consumer confidence report on Friday halted the sell-off, but prior to that, the Russell 2000 had fallen more than 5% from recent highs.

Precious Metals Turn into “Gambling Tools”

Prices of gold and silver have deviated sharply from the “stable” category, and their related mining stocks have naturally followed suit.

Newmont Corp., the largest gold miner in the U.S., is expected to double by 2025, while smaller miners like Discovery Silver Corp. soared 1000%. But this trend is now rapidly unraveling. VanEck Gold Miners ETF plummeted 13% on January 29, its biggest drop in over five years.

“These metals have shifted from boring commodities traded by professionals to provocative gambling tools for retail investors,” wrote Owen Lamont, Senior Vice President and Portfolio Manager at Acadian Asset Management LLC.

This raises concerns for investors trying to use gold miners as safe havens during turbulent times. Double-digit daily and weekly swings are not consistent with risk-averse behavior. “Almost every theme has been pushed to extremes, and gold and silver are no exception,” said Sameer Samana, Global Stock and Physical Assets Strategist at Wells Fargo Investment Institute.

Equity Capital Markets Under AI Threat

As software giants like DocuSign Inc., Salesforce Inc., and Workday Inc. tumbled over fears that AI tools could replace their core businesses, investors began searching for other sectors in the economy that might be disrupted by automation.

According to a report from the Conference Board last October, 72% of S&P 500 companies have updated disclosures stating that AI poses a “significant risk” to their operations. Banks, travel stocks, professional service providers, and the entire small-cap sector are under scrutiny.

If AI disruption becomes destructive, activity in equity capital markets—mergers, acquisitions, IPOs, and stock and bond sales—could slow down. Truist Securities analyst Brian Foran noted in a Thursday report that tech sector M&A grew 77% last year and is expected to again make a significant contribution to bank capital markets this year. “A few weeks of poor trading doesn’t necessarily break this trend—but it doesn’t help either,” he said.

Beyond banking and financial services, investors are also seeing the impact of plummeting software stocks spreading into broader professional services. Stocks like Thomson Reuters Corp. and Morningstar Inc. have already fallen double digits this week.

Keith Lerner, Chief Investment Officer and Chief Market Strategist at Truist Advisory Services, put it plainly: “Should I keep hiring external firms, or let AI do some of the work for me?” He believes industries like online education, media and advertising, outsourcing, and market research could see revenues directly squeezed by AI.

Warnings from the Internet Bubble

The sharp decline in the tech sector has rekindled memories of the internet bubble. In fact, the pace of value stocks outperforming growth stocks last occurred during the 2022 market crash and early internet bubble.

Brian Reynolds, Chief Market Strategist at Reynolds Strategy LLC, pointed out that after 25 years, internet-era favorites like Corning Inc. and Cisco Systems Inc. have finally surpassed their previous highs. He sees this as a warning to investors still enamored with the biggest AI concept stocks, which have tripled or more in recent years.

“History doesn’t repeat, but it often rhymes,” Reynolds quoted Mark Twain. “In bubbles, you must be very disciplined and diversify. If you own a soaring stock, you should trim your position.”

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