Energy, essential consumer goods, and U.S. Treasuries lead the gains in 2026! Wall Street's "AI trading" has been "AI disrupted"

AI was supposed to be the most certain trading theme this year. But it has shifted into a threat—not to the tech giants building AI, but to the lightweight companies that could be replaced by AI.

This week, the S&P 500 index briefly headed toward its worst performance since November, rebounding only after inflation data came in modestly on Friday, while AI disruption fears are spreading across various markets.

White-collar industries such as software companies, wealth management firms, brokers, and tax advisors saw their profit margins, accumulated over the past decade, reprice within weeks. The shockwave even propagated to the private credit markets that lend to these companies.

(Throughout this week, the U.S. utility sector outperformed as a safe haven from AI shocks, while the financial sector was the worst performer of the week.)

The highly confident bets on Wall Street have completely failed within six weeks. Fund managers, whose cash allocations hit record lows and hedging levels dropped to their lowest since 2018 at the start of the year, are now witnessing the collapse of consensus trades—those most favored assets are losing to the least favored.

Energy, consumer staples, and U.S. Treasuries led the 2026 market rally, while the consensus bets on AI at the start of the year have all fallen short. The iShares 20+ Year Treasury Bond ETF (TLT) posted its biggest weekly gain since April, while the S&P 500 tracking ETF (SPY) lagged TLT by 2 percentage points since December, marking the worst start to a year in a decade.

AI shifts from “sure-win” trade to “disruptive” threat

Initially seen as a certainty opportunity, AI investment themes are now the biggest source of market uncertainty.

Investors are questioning the timeline for returns on large-scale capital expenditures by tech giants and whether remaining cash can continue supporting stock buybacks. Vital Knowledge co-founder Adam Crisafulli said:

Over the past few months, stocks hurt by AI have done more damage than they’ve helped.

Morgan Stanley CIO Jim Caron previously stated on a media program:

We’re experiencing a re-pricing in a certain sector of the market, namely the software industry. The market fears this could trigger contagion into other sectors.

He is focused on two issues: whether losses caused by AI will lead to contagion, and how diversification can hedge this risk.

Extreme positions amplify market volatility

Two forces are intensifying the volatility in the U.S. stock market.

First is positioning. An January investor survey by U.S. Bank showed cash allocations fell to a historic low of 3.2%, with nearly half of fund managers holding no downside protection—its lowest level since 2018.

Second is the leverage network connecting seemingly unrelated portfolios, where a liquidation in one corner triggers sell-offs elsewhere. James Athey, portfolio manager at Marlborough Asset Management, said:

The biggest risk here is an additional volatility shock. Everything appears highly correlated, so a sell-off in one asset may force others to sell as well.

Market news reports that Thursday’s broad decline in U.S. stocks triggered algorithmic selling of metals, with some investors forced to exit commodity positions including metals to raise liquidity. Gold plunged over 3% that day, breaking below $5,000, while silver tumbled 11%.

Jordi Visser of 22V Research’s model shows that, even with the VIX remaining low and the S&P 500 staying above its 50-day moving average, market correlation is surging. This combination is interpreted as stress hidden beneath a calm surface.

Over the past two years or so, such stress signals have appeared roughly once a month. But in less than two months this year, they’ve already occurred a dozen times.

This week, the VIX briefly broke above the widely watched 20 level. Although the reading didn’t indicate panic, the skew of put options remained at a historic high, suggesting the market is systematically buying downside protection.

(Year-to-date, the skew of put options has surged.)

The ETF tracking investment-grade bonds (LQD) outperformed the high-yield HYG ETF for the best weekly performance since October, widening its lead for the year. Meanwhile, the 10-year U.S. Treasury yield closed at a two-month low.

(10-year Treasury yield at two-month low)

Investors begin adjusting strategies

Currently, intense volatility has not yet evolved into a sustained market crash.

The S&P 500 remains near its all-time highs, and credit spreads are still close to decade lows. But trading volume in put and call options on individual stocks indicates hedging activity is increasing.

The put-call ratio on the Chicago Board Options Exchange has surged since January, rebounding from a near four-year low.

ETFs that track companies with higher shareholder returns attracted $3.6 billion in new funds this month, the largest among so-called smart beta funds tracked by Bloomberg.

Analysts believe that if negative news about AI disruption pauses and volatility declines, and if dealer hedging shifts toward more supportive positions, U.S. stocks could support an upward move. But as Goldman Sachs’ Chris Hussey notes:

AI will disrupt market consensus across broad sectors of the economy, conflicting with macro data and corporate performance that currently show no signs of abnormality. Will the collective consensus prevail, or will the post-pandemic economic resilience theme continue, keeping U.S. growth and corporate earnings strong? The answer may take quite some time to determine.

Risk warning and disclaimer

Market risks are present; investment should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest accordingly at your own risk.