For the better part of two years, investing felt deceptively simple: buy the Magnificent Seven and wait. Nvidia, Microsoft, Meta, Amazon, Alphabet, Apple and Tesla carried the S&P 500 – the benchmark tracking the performance of the top 500 largest publicly traded companies in the United States (US) – from one record high to the next, powered by the artificial intelligence (AI) spending frenzy that consumed Wall Street’s imagination. That trade has started to unravel in 2026, and the pace of the unwind accelerated sharply this week.
The numbers tell the story. Technology is the worst-performing sector in the S&P 500 year-to-date, down roughly 0.4%, while energy has surged over 14% and materials have climbed nearly 9%. Small-cap stocks have gained over 5% since January, compared to a mere 0.5% for large caps. The iShares Expanded Tech-Software Sector exchange traded fund (ETF) has fallen around 19% since the start of the year, its worst stretch since 2008. Meanwhile, the Dow Jones Industrial Average – heavy with “old economy” names – pushed above 49,500 on Wednesday as the tech-heavy Nasdaq slumped 1.5%. This is not a broad market decline. It is an investment reallocation, and it is gaining momentum.
Investors need more than faith
The catalyst behind the shift is twofold: massive capital expenditure commitments that are testing investor patience, and valuations that leave no room for disappointment. The five major hyperscalers – Amazon, Microsoft, Alphabet, Meta and Oracle – are projected to spend roughly $602 billion on infrastructure in 2026, a 36% increase from 2025, with approximately 75% of that directed at AI. Capital intensity has reached 45% to 57% of revenue for some of these firms, ratios that resemble utilities or heavy industry rather than technology companies. Alphabet’s fourth-quarter earnings this week put a fine point on the issue: the company stated that its 2026 capital expenditure (capex) will be $175 billion to $185 billion, roughly double its 2025 spend, and well above the $119.5 billion Wall Street had expected. The stock slipped despite beating expectations on revenue and earnings.
Investors are no longer willing to accept spending at this scale on faith. The question of when and whether these investments generate adequate returns has moved from theoretical to pressing. Mega-cap tech earnings growth has decelerated from above 37% in 2024 to around 22% by late 2025, and valuation multiples remain elevated. Most Magnificent Seven stocks traded at forward price-to-earnings ratios above 30-times heading into the year, compared to roughly 22-times for companies on the broader S&P 500, causing investors to start looking elsewhere.
The structural concerns
The rotation gained fresh impetus this week from an unexpected direction. Anthropic, the AI startup behind the state-of-the-art language model company, the Claude model, launched a suite of automation plugins for its Claude Cowork platform, targeting legal, sales, marketing and data analysis workflows. One plugin in particular – a legal tool capable of automating contract review, non-disclosure agreement (NDA) triage and compliance processes – triggered a violent selloff in software and professional services stocks. Global content technology company, Thomson Reuters, fell 18%, legal technology and services company, LegalZoom, dropped nearly 20%, and Britain’s RELX, an information-based analytics and decision tools offering, plunged 14% on Tuesday alone. By Wednesday, the selling had spread globally, hitting European names like software solutions companies, SAP and Wolters Kluwer, and communications company Publicis, while Indian information technology exporters including TCS and Infosys fell sharply. Asset managers with exposure to the software sector – Apollo, Ares, Blackstone, KKR – were also caught in the downdraft. All told, roughly $285 billion in market value was erased in two days.
The deeper concern is structural. AI companies, under pressure to justify steep valuations and fund enormous infrastructure budgets, are increasingly moving into the “application layer” – building tools that compete directly with established enterprise software. If large language models (LLMs) can replicate what Software-as-a-Service (SaaS) companies charge in subscription fees, the pricing power that has underpinned much of the sector’s premium is at risk.
Not everyone is panicking, however. Chip maker, Nvidia’s CEO, Jensen Huang, called the notion that AI would replace software “illogical.” JPMorgan’s enterprise software head, Sam Yen, noted it was a stretch to conclude that a single LLM plugin could replace mission-critical systems. SaaS company, Box CEO, Aaron Levie described this as the most exciting moment in his company’s 20-year history. But the market, for now, is pricing in disruption first and asking questions later.
Where is the money going?
Gold, metals and mining companies have posted strong performances. Real assets are leading in 2026 as investors seek tangible cash flows. Small and mid-cap stocks are benefitting from lower borrowing costs, the fiscal tailwinds of the One Big Beautiful Bill Act and narrowing earnings differentials with mega-caps. The earnings gap between the Magnificent Seven and the rest of the S&P 500 is closing – and with it, the justification for extreme concentration.
The rotation may overshoot in either direction. But the message from markets this week is clear: the era of blind faith in AI spending is giving way to a harder-nosed demand for returns. It is a reminder that in 2026, diversification remains the ultimate strategy.
A LOOK AT THE MARKETS
The week’s key themes:
- Weak US labour data bolsters case for rate cut in June
- Wall Street futures down after Amazon’s slide
- Precious metals continue to have a bumpy ride
- Rand slips, but backdrop remains supportive
Bonds
In the US, the 10-year Treasury yield drifted down toward 4.2% – its lowest level in almost three weeks – after a run of softer labour-market signals. Job openings slid to a five-year low in December, announced layoffs jumped to their steepest January-pace since 2009, jobless claims rose to a two-month high, and ADP private payrolls undershot forecasts. Together, those prints strengthened market conviction that the US Federal Reserve (Fed) could begin cutting rates in June, with a second move potentially around September. Separately, the Treasury kept its funding plans broadly unchanged, continuing to tilt issuance toward shorter-dated bills rather than adding meaningfully to long-bond supply – a choice that also helps limit borrowing costs while rates remain high.
In the United Kingdom (UK), 10-year gilt yields pulled back to about 4.55% after the Bank of England (BoE) held rates at 3.75% but sounded more dovish than investors expected. The key surprise was the split on the committee with four out of nine members voting for an immediate 25-basis point cut, pointing to a path for inflation to cool back toward 2% from April, and highlighting weaker demand conditions alongside a softer labour market.
In the euro area, Germany’s bund yields eased to roughly 2.85% as the European Central Bank (ECB) left policy unchanged at its first meeting of 2026, reiterating that inflation should converge toward 2% over time. The European Union’s statistical office, Eurostat’s data reinforced that narrative, with headline inflation slowing to 1.7% year-on-year in January and core inflation easing to 2.2%, while ECB President, Christine Lagarde, cautioned that near-term prints may still be bumpy and policy won’t hinge on any single release.
Locally, South African bonds have remained well supported. The 10-year yield is hovering just above 8%, staying near its lowest levels since March 2018, as foreign appetite is underpinned by improving fundamentals and attractive real yields. The longer end has been stable too. The 20-year yield ticked slightly higher to 8.88% on 4 February, but it remains lower over both the past month and year. The rally continues to reflect a combination of structural reform momentum, perceived fiscal discipline, South African Reserve Bank (SARB) credibility, a more stable political backdrop under the Government of National Unity, and a supportive currency. Tailwinds from firm metals prices and lower oil costs are also helping keep inflation pressures contained. SARB held the repo rate at 6.75% in January, but consensus still leans toward additional easing later this year, with expectations building for cuts to start as early as March, and forecasts clustering around at least 50 basis points of reductions over 2026.
Indices
US equity futures pointed lower this morning, with weakness concentrated in big tech after Amazon’s post-results plunge of 11%. Nasdaq 100 futures were down more than 1%, while S&P 500 and Dow futures dipped around 0.7% and 0.4%. In after-hours trade, Amazon dropped over 10% after flagging a sizeable step-up in capex to roughly $200 billion for the year, largely tied to AI infrastructure. That guidance landed badly in a market already questioning how far – and for how long – the AI investment cycle can run at this intensity. The tone had already soured on Thursday: the S&P 500 fell 1.23% and the Nasdaq Composite 1.59%, marking a third straight session of declines, with the Dow down 1.2%. Chips led part of the drag after semi-conductor company, Qualcomm, sank 8.5% on a cautious outlook linked to softer memory demand and inventory headwinds, while software names stayed under pressure amid worries that AI-driven disruption could reshape the sector’s earnings durability.
In the UK, the FTSE 100 gave back ground after notching a record high the day before, sliding 0.9% on Thursday as the BoE’s rate-cut decision delivered a more dovish message than expected. Sector moves were decisive: miners were hit as gold, silver and copper eased, dragging Glencore down nearly 8%, Fresnillo down 6%, Antofagasta lost 2.9%, Rio Tinto 2.7% and Endeavour 2%. Anglo American fell about 3.1% after trimming its 2026 copper output forecast. Banks also underperformed, with Lloyds and NatWest down more than 5% each, Barclays off more than 3%, and HSBC lower. Energy added to the downside as crude softened – Shell fell 3.6% and BP 1.9% – with Shell’s quarterly profit slightly below expectations despite a $3.5 billion buyback. Telecommunications company, Vodafone dropped 4.5% after service revenue growth came in slower than hoped.
European equities closed lower on Thursday as disappointing earnings and policy messaging weighed. The Euro Stoxx 50 fell to 5071, while the Stoxx 600 dropped to 611.30. The ECB left rates unchanged, and President Lagarde played down the latest softer inflation signals as well as concerns about a stronger euro – tempering expectations for near-term cuts. Company results were a key driver: Energy giant, Shell, slid 3.5% on the profit miss amid weaker crude, Spanish financial services group, BBVA, dropped 8.8% after results fell short, Danish logistics company, Maersk lost 3.5% after warning 2026 earnings could decline, and German technology group, Rheinmetall, fell 6.5% after lowering guidance. Offsetting pockets of strength included French financial services holding company, BNP Paribas, which gained 1.5% after lifting its outlook for shareholder returns, and steel and mining company, ArcelorMittal, which edged higher on a stronger-than-expected fourth quarter profit.
At home, the FTSE/JSE All Share was trading around 118,539 at closing yesterday, after opening near 120,612 and moving within a 119,758 to 121,042 range on the day. That sits within what’s been a choppy start to February. On Monday 2 February, the ALSI was down as much as 6.1% intraday – its sharpest intraday decline since March 2020 – as precious-metal prices slumped, before paring the move to close about 1.1% lower. The index then bounced strongly on Tuesday, rising 1.41% to 120,581, and carried on stabilising into mid-week.
Commodities
Precious metals were less about trend, this week, and more about volatility. Gold climbed back toward $4,830/ounce mark after earlier weakness, as markets continued to swing aggressively following a record-setting January. Recent selling has already erased much of gold’s year-to-date progress, reflecting a combination of positioning cleanup after repeated highs, and shifting rate expectations. In the background, softer US labour signals helped keep the “rate cuts later this year” narrative intact with traders still leaning toward a first Fed cut around June. Geopolitics added another layer, with the White House stressing that US President, Donald Trump, prefers diplomacy with Iran, framing negotiations as the base case while keeping military options as a fallback. Gold is tracking for a second straight weekly decline.
Silver saw another extreme bout of whiplash in early trade, sliding as much as 9.6% to roughly $64.1/ounce before clawing its way back above $70/ounce. The move had all the hallmarks of a forced deleveraging cycle rather than a slow shift in fundamentals as positioning was crowded and liquidity thinned; and once the selling started, it accelerated quickly. From its 29 January high, silver is now down more than 40%, erasing its year-to-date gains and registering its sharpest collapse since 1980.
Base metals were softer too. Copper held below $5.85/pound on Thursday after nearly a 4% drop in the previous session, weighed by a clearer supply story in China and rising inventories. An industry forecast pointing to another year of growth in refined copper output – after a strong increase last year – added to the sense that availability is improving. Stockpile builds in key hubs, particularly London Metal Exchange warehouses in Asia, reinforced that message and hinted that material initially destined for the US may have been rerouted elsewhere. On the demand side, buying from Chinese fabricators slowed again as the market heads into Lunar New Year disruptions, and the dip-buying, earlier in the week, faded as the broader metals complex (especially gold and silver) came under renewed liquidation.
Energy markets stayed on the back foot, with Brent drifting down toward $67/barrel on Thursday and setting up for its first weekly decline in six weeks. The immediate focus was the Iran-US talks scheduled for later in the day as confirmation that negotiations would proceed took some heat out of near-term conflict risk and eased fears of a sudden supply shock linked to Iran. That said, expectations remain tempered because there’s still uncertainty around what the talks will actually cover – and whether either side is willing to move enough to close the big gaps. Price action also reflected a supply-heavy undertone after Saudi Arabia cut the official selling price for its key crude grade to Asia to its lowest level since late 2020, a signal that the market is not tight. The reduction was smaller than many anticipated, which may suggest Riyadh still sees demand holding up, but the direction of price movement still points to oversupply risk. Traders are also watching the Russia-Ukraine situation after new strikes on Ukrainian energy infrastructure, even as Washington and Moscow work to reopen senior-level military dialogue – a mix that keeps headline risk alive, but hasn’t translated into a sustained risk premium on crude.
Currencies
The US dollar held onto its recent strength, with the US Dollar Index sitting just under 98 and hovering near a two-week high. The backdrop was classic risk-off, with weakness across equities, commodities and crypto increasing demand for liquidity and defensive positioning, keeping the greenback supported. The dollar’s upswing has also been reinforced since President Trump nominated Kevin Warsh as the next Fed Chair. Markets have treated the nomination as a signal for a more conservative policy stance – favouring a smaller balance sheet and a slower, more cautious approach to easing – while also reducing the market’s earlier anxiety around Fed independence. That said, the macro data flow has not been uniformly hawkish in regard to the dollar. A run of US labour-market indicators this week hinted at cooling momentum, which has kept expectations for rate relief alive. Pricing still leans toward two Fed cuts this year.
In Europe, the euro traded near $1.18/€, recovering after early softness as the ECB’s message remained steady. The central bank kept rates unchanged, repeated that inflation should converge to 2% over the medium term, and acknowledged resilience in the euro area economy, while emphasising that the outlook is complicated by global trade policy risks and persistent geopolitical tensions. President Lagarde framed the inflation backdrop as being in a “good place,” but warned against overreacting to any single data point given that readings may be noisy in the months ahead.
Sterling, by contrast, was on the defensive, slipping below $1.36/£ to its weakest level since 22 January. The trigger was not the BoE’s decision to hold the Bank Rate at 3.75% – that was expected – but rather the BoE’s tone and the vote split. Political noise compounded the pressure as scrutiny rose around Prime Minister Keir Starmer’s leadership after his appointment of Peter Mandelson as UK ambassador to the US, given renewed attention on Mandelson’s past links to Jeffrey Epstein.
Closer to home, the rand softened toward R16.28/$, caught between a stronger dollar and a weaker commodity complex. Precious metals in particular have been a headwind, with gold and platinum prices slipping, which matters, given their importance in South Africa’s export basket. With global volatility elevated, the broader tone has also been unfriendly for emerging market currencies, as investors typically trim risk and reduce emerging-market exposure during sharp risk-off phases. Even so, bigger-picture support for the rand hasn’t disappeared. Recent gains have been underpinned by improving domestic fundamentals, ongoing reform momentum, a more disciplined fiscal narrative, and supportive external conditions. Higher commodity prices (despite the latest pullback) alongside relatively low oil costs have helped South Africa’s terms of trade, encouraging foreign inflows into both equities and bonds.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.18
EUR/ZAR: 19.06
GBP/ZAR: 21.94
GOLD: $4,866.70
BRENT CRUDE: $68.27
Sources: Bloomberg, Investing.com, Reuters, Trading Economics and TradingView.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.