AI Shock Rocks Big Tech as Investors Brace for Jobs, Inflation, and a Market Turning Point

Wall Street is heading into the new week on edge, caught between an artificial intelligence–driven shakeout in Big Tech and a wave of economic data that could redefine where markets go next.

What began as a narrow pullback has grown into a deeper rout, particularly across software stocks, as investors reassess how disruptive AI may be—not just for competitors, but for the industry’s biggest incumbents. The fallout has been powerful enough to drag down the broader market, erasing the S&P 500’s gains for 2026 and forcing investors to rethink long-held assumptions.

The technology sector, long the engine of the bull market that began more than three years ago, has slid more than 12% since peaking in late October. Software has taken the brunt of the damage, with the S&P 500 software and services index plunging 17% in just over a week.

That weakness matters. Tech still represents roughly one-third of the S&P 500’s total weight, meaning sustained losses can overwhelm gains elsewhere. And while other sectors are thriving, the index itself has fallen more than 1% over the same period.

“A market can absorb a prolonged rotation with large sector winners without obvious index-level stress for quite some time,” said Jim Reid, head of macro and thematic research at Deutsche Bank. “However, the longer and deeper the selloff in a dominant sector becomes, the harder it can be for the broader index to withstand the drag.”

At the heart of the selloff is a growing realization that AI won’t lift all companies equally.

Earlier enthusiasm treated artificial intelligence as a universal growth accelerator. Now, investors are questioning which firms truly benefit—and which could be left behind. Disappointing earnings, including from Microsoft, amplified fears that even giants may struggle to meet sky-high expectations.

“Before it was, AI lifted all ships,” said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. “Now there are concerns that this massive acceleration in the technology space could cause other businesses to not see the kind of growth rate they did before.”

The coming week will add more fuel to that debate, with software earnings due from AppLovin and Datadog, while heavyweight names like Coca-Cola, Cisco Systems, and McDonald’s report as earnings season winds down.

Beneath the surface, not all is bleak. Investors have been encouraged by a decisive rotation into sectors that lagged for much of the bull market. Energy, consumer staples, and industrials have emerged as standout performers so far this year, with three sectors posting double-digit gains.

“Rotation is the dominant theme this year,” said Angelo Kourkafas, senior global investment strategist at Edward Jones. “We’re seeing old-economy sectors and stocks really get some love. At the same time, expectations for tech are so high that no matter what companies report, investors seem inclined to take profits.”

As tech volatility rattles investors, attention is shifting toward the economy itself.

After being delayed by a brief government shutdown, January’s nonfarm payrolls report is set for Wednesday. Economists expect 70,000 new jobs, according to a Reuters poll, as markets look for signs that recent labor market weakness has stabilized. While the Federal Reserve cited steady employment when it held rates last month, a recent survey showed layoffs surged in January, muddying the outlook.

Then comes inflation. The January consumer price index, due Friday, will offer the latest reading on price pressures the Fed still considers “somewhat elevated.”

With risks to both inflation and employment seen as easing, markets largely expect the Fed to hold off on further rate cuts until June. By then, President Donald Trump’s newly nominated Fed chair, Kevin Warsh, could be at the helm.

Despite that uncertainty, rate expectations have remained surprisingly calm. Futures markets continue to price in roughly two quarter-point cuts by December, a view that has held steady even after Warsh’s nomination.

“Rate expectations have been remarkably stable,” Kourkafas said. “We’ll see if weakness in the labor market or a surprising cooldown in inflation accelerates the timeline for the next cut.”

The coming days may prove pivotal. An AI-led tech shakeout is testing the market’s foundation just as investors confront crucial signals on jobs, inflation, and monetary policy.

Whether this turns into a deeper correction—or simply marks a painful but healthy rotation—may depend less on algorithms and earnings calls, and more on what the economic data reveals about the road ahead.