AI Wrecking Ball: What's Next For AI Stocks and Market?

• Oracle's credit default swaps surged from 40 basis points in September to 160 basis points currently, reflecting investor concerns about whether hyperscalers can generate adequate ROI on massive AI infrastructure spending
• Market divergence has reached levels typically seen during selloffs, with performance dispersion among index members at extreme levels even as the S&P 500 is down just 2.5% from its January all-time high
• Leverage data shows the six-month growth in margin account debit balances has slowed after a surge in late 2025, historically a signal that precedes market reversals

Summary: AI Disruption Triggers Market Volatility Across Sectors

A wave of AI-driven selling, dubbed the "AI Scare Trade," is causing sharp declines across multiple industries as investors react to potential business model disruptions from artificial intelligence capabilities.

Key Price Movements and Affected Sectors

Credit rating agencies experienced severe drops: S&P Global and Moody's fell 25% and 20% respectively over recent weeks. Raymond James declined 10% following the announcement of an AI financial planning tool. The trucking industry saw billions wiped from market capitalizations after Florida-based Algorhythm Holdings reported improving customer freight volumes by 300-400% without additional headcount. Other affected sectors include wealth services, real estate firms, insurance brokers, and legal services.

Market Context and Concerns

Despite sector-specific turmoil, the S&P 500 sits just 2.5% below its late-January all-time high, with the TSX down only 2.0% from mid-week highs. However, performance dispersion among index members has reached levels typically seen during market sell-offs, indicating significant underlying fragility.

Growing concerns surround hyperscalers' return on investment, exemplified by Oracle's credit default swaps rising from 40 basis points in September to 160 basis points currently. The market appears caught between skepticism over massive AI infrastructure capex and recognition of AI's disruptive potential.

Investment Implications

Analyst Craig Basinger of Purpose Investments notes that margin leverage growth has slowed based on December data, with investors' debit balances losing upward momentum—historically a precursor to market reversals. The combination of leadership changes, declining margin leverage, and knee-jerk price reactions suggest caution, though oversold conditions may create selective opportunities. Defensive sectors and cyclicals have partially offset technology weakness.