By: Brent Schutte, Northwestern Mutual Wealth Management Company
The end of January brought big market swings as divergent tech earnings and an impending changing of the guard at the U.S. Federal Reserve fueled significant market volatility. The first week of February was little different, as questions over the sustainability of artificial intelligence (AI) demand left the S&P 500 and Nasdaq Composite slightly in the red after a multi-day sell-off in the technology sector—even after a surge on Friday that pushed the Dow Jones Industrial Average past 50,000 for the first time ever. Gold and silver prices also stabilized toward the end of the week despite extreme volatility after its parabolic move higher was followed by the prior week’s crash, and investors debated the implications of the recent nomination of Kevin Warsh as Fed Chair.
Friday’s rally came amid renewed pledges from tech giants to spend hundreds of billions on AI as well as reassurances from Nvidia chief Jensen Huang that AI demand is “incredibly high,” encouraging investors to “buy the dip” after days of heavy selling. A significant bounce in Bitcoin, which rose back above $70,000 after falling as much as 52 percent from its October highs, also replenished investors’ appetite for risk.
Nevertheless, the end-of-week recovery in the major indices has masked a significant market leadership shift and broadening that is occurring within markets. Recent market leaders, including the “Magnificent Seven” technology heavyweights and cryptocurrency, have come under pressure. Amazon fell 12 percent last week—wiping more than $310 billion from its market value after it announced a staggering $200 billion capital expenditure plan for 2026—and Alphabet slid 4.6 percent after revealing its own sweeping AI expansion plans. This pulled the Bloomberg equal-weighted basket of Mag Seven stocks down 4.66 percent down for the week.
Meanwhile, a basket of nonprofitable tech companies created by Goldman Sachs—the performance of which has been heavily tied to the AI boom—that we have previously pointed to as an area of concern fell as much as 11 percent last week as of Thursday and finished the week lower by 3.34 percent after Friday’s rally.
As mega-cap and AI-tied growth stocks have been increasingly challenged over the past few months, we have seen a rotation to other areas of the market that we believe offer compelling opportunities for patient, long-term investors who are willing to embrace diversification. The S&P 600 index of Small-Cap stocks gained 3.95 percent last week despite the broader tech rout and is up nearly 9.9 percent year to date, while the S&P MidCap 400 Index rose 4.36 percent and is currently up 8.6 year to date as investors went on the hunt for value. An equal-weighted version of the S&P 500 also outperformed the Large-Cap index, rising 2.13 percent during the week and 5.6 percent year to date. Meanwhile, the S&P 500—which is heavily influenced by the Mag Seven, down 4.13 percent year to date—is up only1.35 percent for the year.
Some of this rotation is being fueled by the lower interest rate environment after the Fed made three consecutive 25-basis-point cuts in 2025, which has taken the pressure off more rate-sensitive areas of the economy, including smaller-cap companies. This was reflected by recent data from the Institute for Supply Management (ISM) Manufacturing Report, which we’ll touch on in greater detail below, showing that the manufacturing sector joined the services sector in expansion for the first time in 11 months. However, we note both the manufacturing and services reports show that price pressures remain, particularly in the services sector, due to persistent labor market tightness and the delayed pass-through of tariff costs, among other factors.
While the recent services expansion comes as a positive sign, we continue to worry about the weakness in the labor market, which, as we have consistently highlighted in recent months, has at least historically served as a canary in the coalmine when it comes to future economic weakness. While the January labor market report from the Bureau of Labor Statistics (BLS) that was set to be delivered on Friday was delayed until later this week, other labor market indicators continued to point to a weak labor market.
Reports by private payroll providers ADP and Revelio Labs showed significant cooling in the U.S. economy. ADP showed that U.S.-based employers added only 22,000 jobs in January, with Revelio Labs reporting that the U.S. economy lost 13,200 jobs. Concerningly, Challenger job cuts announcements continued their elevated pace from 2025 with the January 2026 release showing the largest total job cuts since January 2009, while the BLS’s most recent Job Openings and Labor Turnover Survey report from December showed that job openings declined sharply to 6.5 million in the final month of 2025, the lowest figure since September 2020. With 7.5 million Americans unemployed as of December, we now have 1.15 job hunters for each opening, the highest ratio since March 2021. We continue to believe that the pace of job gains in the U.S. is around 20,000 per month, a mere rounding error in a labor market of 171 million people.
The economy and markets remain in a delicate balance, offering both hopeful and concerning data points on which to guide our investment decisions. We continue to urge investors to remain focused on the intermediate to long term rather than chasing immediate gains and embrace diversification to capitalize on the continued broadening of the market into Small and Mid-Cap stocks.
About the Author:
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
