By Samer Hasn, Senior Market Analyst at XS.com
S&P 500 futures declined by 0.5% today to reach a new November low of 6751.50, driven by a toxic set of factors of extreme competition and disruption by AI companies, weakening labor data and a resurgent dollar.
Greenback is acting as a wrecking ball for global liquidity just as the AI mutual disruption thesis gains traction. Traders are fleeing to safety because they fear that the tech sector’s deflationary pressures are finally breaking the broader market’s back.
The epicenter of this quake is Anthropic, which has arguably triggered an existential crisis for the entire software industry. According to The Wall Street Journal, their latest Claude agents can perform autonomous coding and legal work, forcing investors to price in a future where corporate clients can simply bypass traditional SaaS providers. This is a repricing of the terminal value for companies like Salesforce, whose competitive moats are evaporating overnight.
This technological leap is forcing hyper-scalers into a ruinous spending war that is spooking even the bond market. With Amazon and Microsoft committing to capital expenditure exceeding the GDP of some nations, DBS Group Research notes that momentum trades are unwinding rapidly as investors question the ROI of this $600 billion gamble. The market is waking up to the reality that this AI arms race might burn cash faster than it generates profit amid extreme competition.
The rot is spreading from equity into credit markets and creating a dangerous feedback loop for leveraged buyouts. The Wall Street Journal highlights that software loans, which make up a massive 13% of leveraged loan indices, are trading down as lenders fear these AI disruptions could trigger a wave of defaults. If these stable recurring revenue businesses are disrupted, the collateral underpinning private credit portfolios becomes essentially worthless.
Adding fuel to the fire, recent data paints a picture of a cooling real economy that can no longer support high valuations. A set of weak labor reports suggests the soft-landing narrative is a dubious hypothesis, leading Baird strategists to warn of a throwing the baby out with the bathwater effect.
The fallout has rippled through Asian sessions, with South Korea’s Kospi and Hong Kong’s Hang Seng tracking Wall Street’s losses.
While the rising cost of AI dominance might drain liquidity from other sectors and leave emerging markets and cryptocurrencies vulnerable to capital shortage.
The growing anticipation of developments in the Middle East, particularly concerns about a potential regional war if the US and Israel launch attacks on Iran, may increase risk aversion as the week comes to an end. Donald Trump might be inclined to wait until after the markets close before taking any actions that could significantly impact the markets. Additionally, the US administration’s discussions about negotiations might just be a strategic smokescreen to buy time to gather more military assets in the region, similar to the tactics used during the previous twelve-day conflict.