U.S. stocks "two consecutive positive days"! "Big Seven Tech Giants" all rise, is the AI sell-off wave nearing its end?

After a recent wave of selling in the artificial intelligence (AI) sector, U.S. stocks gradually stabilized this week, posting two consecutive days of gains following Presidents’ Day.

As of the close on February 18 local time, the S&P 500 index rose by 38.09 points, or 0.56%, to 6,881.31; the Dow Jones Industrial Average increased by 129.47 points, or 0.26%, to 496,662.66; the Nasdaq Composite gained 175.251 points, or 0.78%, to 22,753.635; and the Nasdaq 100 index rose by 197.272 points, or 0.80%, to 24,898.868.

According to First Financial, despite Wall Street investment banks believing that the AI sell-off is nearing its end, some investment institutions remain skeptical. Large capital expenditures throughout the year will significantly squeeze tech giants’ self-operated cash flow and buyback dividends. Before Nvidia announced its earnings, few traders were willing to heavily bottom-fish tech stocks.

Traders Watch AI Sell-off Momentum

Technology and energy stocks became the main drivers of the U.S. stock rally on the 18th. The “Big Seven” tech giants all rose during the session, with Nvidia and Amazon both climbing nearly 3%. Thanks to Meta’s agreement to deploy millions of Nvidia chips over the next few years, Nvidia’s stock price rose nearly 1.63%.

However, recent U.S. stock performance has been lackluster, with high volatility. The S&P 500 has hovered around the 6800 level for nearly half a year. JPMorgan Chase analysts believe that over the past week, the S&P 500 declined by 1.4%, marking the worst week since late November last year. The index has performed poorly this year, with only two weeks of weekly gains out of seven, and remains in negative territory for the year.

On one hand, capital spending by tech giants is increasing daily with little significant return; on the other hand, software stocks suffered heavy selling amid news related to AI agents, falling about 24% over the past three months. Yet, earnings estimates for the next two years are actually about 5% higher, indicating intense valuation cuts. Market confidence remains low, with giants like Salesforce under pressure.

However, a hedge fund investment manager in New York told First Financial that funds have started to bottom-fish the software sector over the past two weeks. They see the impact of AI agents as more emotional than fundamental in the short term, unlikely to affect the fundamentals of software giants soon.

JPMorgan’s trader notes mention that traders do not believe AI will eliminate all software companies and do not recommend shorting semiconductors before Nvidia’s earnings. However, their attitude toward buying software on dips is warming.

Goldman Sachs’s latest report also states that AI technology mainly acts as a powerful intelligence layer rather than a foundational replacement. AI models still depend on record-keeping systems to maximize their value. Especially in enterprise environments, AI models require large amounts of high-quality, structured, and historically accurate data for training and operation. Existing record systems, including SAP, Salesforce, Oracle, and Workday, have spent decades establishing robust data validation, governance, and compliance processes. For example, AI applications for financial planning and analysis must extract accurate historical data from carefully maintained and audited trusted ledgers.

Although the software sell-off has temporarily subsided, concerns about hyperscalers—large cloud service providers, mainly tech giants—persist.

Since the start of the year, the S&P Equal Weight Index (SPW) has outperformed the market-cap-weighted S&P 500 by 591 basis points, largely due to the -5.9% drag from the “Big Seven” tech giants. What exactly causes this discrepancy?

JPMorgan Chase points out that over the past year, the market has been punishing the “Big Seven” for exceeding expectations in capital spending. Going forward, the market needs to regain confidence in valuations. Before Nvidia’s earnings, valuations of related companies looked cheaper, but such events often make stocks even cheaper.

Goldman Sachs hedge fund trading head Tony Pasquariello mentioned in a recent trading note that hyperscalers’ capital expenditures are now expected to account for 92% of this year’s operating cash flow. If realized, this would surpass the investment intensity of S&P 500 tech companies in the late 1990s.

“In a winner-takes-all environment, I’m not saying this is capital misallocation. I’m just saying that the argument that ‘relative to past cycles, this ratio isn’t large’ is rapidly losing its persuasiveness,” he said.

Fortunately, U.S. stocks have delivered impressive earnings this earnings season. “Q4 reports have been very impressive, with five consecutive quarters of double-digit profit growth. I believe the most notable development is the rise in profit margins of S&P 500 companies, reaching a record 12.6%. Although this is retrospective data, I think margin expansion is an important signal for the longer-term trend of U.S. stocks,” Pasquariello added.

Powell Unlikely to Cut Rates Before Leaving Office

In the short term, the probability of rate cuts in the U.S. appears low, making it unlikely to provide support.

The Federal Reserve’s minutes released overnight highlight internal disagreements over rate decisions, with a more cautious stance on rate cuts and a focus on inflation risks. Following the minutes, U.S. Treasury prices fell further, and the dollar index rose.

The January FOMC minutes state that “almost all” participants support maintaining the federal funds rate in the 3.5% to 3.75% range, which would put the Fed “in a good position” to assess new data. Fed officials Milan and Waller dissented, favoring a 25 basis point rate cut, citing that policy remains “significantly restrictive” and that downside risks to the labor market have increased.

In addition to the hawks and holdouts, the minutes for the first time mention discussions about the possibility of rate hikes. This reflects that, with inflation persistently above the Fed’s 2% target and the economy remaining resilient, the Fed’s focus has shifted back to inflation risks rather than employment slowdown. Recent non-farm payrolls data exceeded expectations, further reducing the likelihood of a rate cut in the near term.

“The minutes align with our forecast that unless the labor market weakens further, the FOMC is unlikely to cut rates again soon. We expect the next cut to be in June, with a second 25 basis point cut in September,” Goldman Sachs said overnight.

It appears that employment market weakness previously pressured the Fed to consider rate cuts, but inflation was an obstacle. Now, with signs of employment stabilization and expectations that AI-driven capital spending will boost GDP beyond expectations, whether inflation can continue to cool remains uncertain. In this context, the probability of rate cuts in Q1 is nearly zero.

UBS told First Financial that they expect one more rate cut in Q1 2026, and that the risk of delaying the next cut until summer after the January meeting is rising. They believe the next rate cut will be driven by weakening labor markets, the fading of tariff-related inflation, and other inflation trends outside tariffs. The market currently expects that after Powell’s term ends, possibly in July, rates may be cut again.