Artificial intelligence disrupts the market: the rotation of capital between technology and industry

Market experts are sounding the alarm about a radical transformation underway in global markets. AI is not only threatening the $450 billion software industry but also triggering a massive reallocation of capital that will create winners and losers in the coming months. According to a Fundstrat analyst, this dynamic will have significant implications for employment and investors’ portfolio compositions.

Why Artificial Intelligence Threatens the Software Sector

The software industry, once the undisputed leader in the tech landscape, is facing an existential crisis. Automation powered by intelligent systems is eroding the very value that traditional software companies offer to customers. When software becomes less relevant, deflation occurs: services that once cost high prices become commodities or disappear altogether.

Job reductions in the sector are imminent. Companies that built software solutions will find that many of their problems are now solvable through generative AI tools, reducing demand for developers and software specialists. Recent observations suggest that job losses “will come soon,” dragging along employment projections that the Federal Reserve has been monitoring.

The Macroeconomic Outlook: Are Rates Falling?

The rise of AI as a disinflationary force is changing monetary policy calculations. Core CPI is expected to fall to 2.52% in January data—levels comparable to the pre-pandemic 2017-2019 averages. This return to pre-COVID inflation levels could give the Federal Reserve enough room to cut interest rates on Fed funds.

The appointment of Kevin Warsh as a likely Fed chair signals a shift in market expectations. While investors initially interpreted this choice as hawkish, analysis suggests the opposite: Warsh favors lower rates, even if he prefers a more restrained growth of the federal balance sheet. With increasing employment pressure due to AI and other structural forces, an accommodative Fed seems the most likely path. Rate cut margins are substantial compared to current levels, providing the central bank with ample tools for intervention.

From the Magnificent 7 to Infrastructure Builders: The New Market Hierarchy

Over the past year, the stock market has been dominated by the “Magnificent 7”—Apple, Microsoft, Google, Amazon, Meta, Tesla, and Nvidia. These tech giants led the AI revolution, but now capital is flowing toward a completely different category of companies: the “gunmakers” of the AI era.

The winners of the next phase will not necessarily be software creators but critical infrastructure providers: energy producers, power generators, data center operators, and semiconductor manufacturers. These companies are capturing the massive capital expenditures needed to build the physical foundation upon which AI relies. Software companies—the original disruptors of the digital age—risk becoming the biggest casualties of this transition.

This reallocation will cause the US market to decline by 10% to 20% as capital exits the Magnificent 7 and shifts toward industrials, materials, and financials. However, a hidden opportunity exists: international markets are poised to become the major beneficiaries. The composition of US indices is heavily weighted toward the Magnificent 7—55%—creating excessive tech exposure. Conversely, foreign markets have a natural tilt toward industry, materials, and diversified sectors—precisely where global capital is now flowing.

Crypto Amid Deleveraging and the Search for a New Balance

The bullish forecasts by a well-known analyst for Bitcoin and Ethereum in January did not materialize. The crypto sector experienced a deleveraging shock in October that was far worse than the FTX collapse of November 2022. Two specific factors disrupted the recovery path that was taking shape.

First, tweets on October 10 about trade tariffs triggered a cascade of liquidations just as crypto was beginning to show classic V-shaped recovery signs (a process typically taking six to eight weeks). Second, investor behavior changed dramatically: FOMO shifted from gold to crypto and vice versa. Investors felt “embarrassed” holding crypto positions while stocks and precious metals outperformed.

Despite these recent setbacks, analysts believe the crypto sector “appears very close to a bottom” because long-term fundamentals remain positive. During Hong Kong’s Consensus, the mood among traders was pessimistic, with widespread doubts about whether to hold crypto positions or rotate into alternative assets like gold. However, these periods of extreme uncertainty have historically coincided with price consolidation before new upward moves.