AI fears drive volatility, triggering declines in stock market it powered for years

For three years, AI was the stock market’s savior. Suddenly, it’s become a marauder, and virtually no corner of the equity market looks safe from its impact.

Just in the past 10 days, investors have delivered swift routs to companies toiling in industries as disparate as logistics, real estate, software, private credit, insurance and wealth management. In each case, the release of a new artificial intelligence tool, most famously from Anthropic PBC but also from small, lesser-known startups, prompted a rapid reassessment of business prospects.

While some of the selling pressure eased Friday, major US averages are headed for a second week of losses. Financials have led the drop this week, along with makers of consumer discretionary products and technology firms. The Cboe Volatility Index remains above its long-term average, and investors are paying up for protection against more turbulence in the near-term.

“All we have done and seen in the past few weeks is the market torch the perceived AI losers. Obviously the definition of AI losers is changing almost daily to the point where you can’t track it via themes or baskets,” said David Wagner, portfolio manager at Aptus Capital Advisors.

The one constant is that AI applications have become the market’s bogeyman, capable of erasing billions in value in a matter of hours as investors question the very viability of large swaths of the corporate landscape. The fear of disruption from AI is so high that even seemingly small announcements or product releases have led to sharp reactions for entire sectors.

Take Thursday, where a tiny karaoke-turned-AI-logistics company issued a press release on a new AI tool and shares of CH Robinson Worldwide Inc. and Landstar System Inc. tumbled, taking the whole sector down with them. Days earlier, Charles Schwab Corp. and its ilk got hammered on news of a new wealth-advisory AI application. Tax-preparation firms look vulnerable, along with real estate groups — and so they came in for a housing.

The seeming randomness of the declines, along with the sheer breadth of what is getting hit has left investors with the feeling that any part of the market could be next.

“The perception is spreading like a wildfire, and it’s spreading horizontally,” Joseph Shaposhnik, portfolio manager at Rainwater Equity, said. “In other words, it was once confined to a particular sector, and now it’s spreading across sectors, the fear of the risk.”

An increasingly uncertain macroeconomic backdrop is adding to the tension. Valuations are stretched across the board with the S&P 500 Index only two weeks removed from a record after three years of double-digit gains. President Donald Trump’s ever-changing policies and ongoing tariff threats have added to volatility. Wall Street also is hyper-focused on labor market and inflation data for clues on the path for interest rates.

There’s some sense, visible in the ups-and-downs of the broader market, that the AI selloff is overdone, at least in its breadth.

“People are extrapolating what’s happened in the software sector to what’s happening in other sectors of the economy. And I just don’t know if that is a fair analogy,” said Jim Thorne, chief market strategist at Wellington-Altus. “I think they’re misplaced, I’ll put it that way.”

Of course, the swift declines in shares cut both ways, offering investors a chance to buy the dip in companies they think have been unfairly punished and are now trading at enticing discounts. That may prove to be a more fruitful investment strategy than attempting to divine the market’s next victims.

“It’s better for investors to focus on where are the opportunities,” said JoAnne Feeney of Advisors Capital Management. “It’s very hard to know what’s going to be disrupted.”

Goldman Sachs Group Inc. this week rolled out a custom basket of stocks that attempts to navigate the upheaval in the software sector. The basket is a pair trade which goes long shares of companies whose businesses are seen as difficult for AI to displace, while simultaneously shorting firms whose workflows AI could increasingly disrupt.

At the same time, it may take longer than hoped for beaten-down stocks to regain upward momentum after AI disruption-sparked selloffs, even if they report solid earnings that display healthy fundamentals.

“Narratives take hold much longer than what many investors would think, and it takes a lot for the market to finally believe that those myths have been debunked,” Wagner said.

Stocks where “the market has kind of grabbed the narrative that they may be an AI loser, their stocks may be put in the penalty box for quite some time, even if they continue to execute over the next few quarters,” he said.