Investors are feeling the pangs of an AI downturn, with growing concerns about how this technology might disrupt both businesses and the economy. The tech sector has been particularly hard hit, as a wave of sell-offs has swept through software stocks. This turmoil was exacerbated by recent updates from Anthropic and troubling labor-market forecasts from Citrini, adding to an already tense atmosphere. Even strong earnings from industry heavyweight Nvidia failed to alleviate investor anxieties, signaling a broader sentiment of fear regarding the future of AI investments.
In light of these developments, Business Insider consulted with three investment experts to gauge the prevailing questions on investors’ minds: What does the future hold for the AI trade? John Belton, a portfolio manager at Gabelli focused on growth stocks, expressed surprise at the intensity of the sell-off, noting, “Everybody’s just kind of walking on the tightrope, waiting for the shoe to drop.” Daniel Newman, CEO and principal analyst at Futurum, echoed this sentiment, indicating that the volatility has left many investors fearful.
Paul Meeks, head of tech research at Freedom Capital Markets, has seen a substantial shift in his outlook, stating that he now predicts the tech sector will lag behind the broader S&P 500 through 2026, contrary to his earlier expectations of tech outperforming the market.
One major concern highlighted by Newman revolves around the private credit sector. He metaphorically referred to it as a “death bomb,” referencing growing apprehensions about how companies will finance their capital expenditures. This anxiety intensified following recent headlines surrounding Blue Owl Capital, where both economist Mohamed El-Erian and JPMorgan’s Jamie Dimon expressed concerns reminiscent of the pre-2007 financial crisis atmosphere. The repercussions of these fears have further compounded worries related to the software sector and the performance of data center operations.
Adding to the turmoil, big banks are not immune to the pressures stemming from AI disruptions and private credit dynamics. Recently, large financial institutions have heavily invested in private credit, engaging in the leveraged loan market and financing operations through collateralized loan obligations (CLOs). Meeks pointed out that these banks could face increased scrutiny, particularly as comparisons are drawn to the financial stressors of 2007. Belton emphasized that the banking sector might not fully account for its exposure to AI-related risks, particularly if the labor market takes a downturn, suggesting a looming vulnerability should the economy shift.
The potential impact of “physical AI,” which involves systems interacting in the physical realm—such as automated machinery and self-driving vehicles—is another critical point raised by analysts. Citi has projected that the total addressable market for warehouse automation could swell to $112 billion by 2029. Meeks also identified the industrial and transport sectors as particularly ripe for disruption due to advancements in physical AI technologies. He cautioned that as investors shift away from technology stocks, they might inadvertently increase their vulnerability to shifts created by physical AI innovation.
Belton warned that the current preference for cyclical sectors like consumer staples and industrials might ultimately backfire, leading to inflated stock valuations that could destabilize if AI triggers significant economic upheaval.
Finally, the software sector, already battered, still faces challenges ahead. Newman anticipates some recovery, but emphasizes that it will not be uniform across the board. He predicted that application software companies that emerged during the SaaS boom, particularly those lacking robust “data moats,” would likely either be consolidated into larger platforms or face elimination. He cited companies like Expensify and Monday as potential casualties of this market realignment, highlighting that many software firms without the protection of a broader ecosystem may see further declines before sentiment begins to improve.
