Market Recap:
The S&P 500 fell 0.44% WoW to 6,878.84 and the Nasdaq Comp fell 0.95% to 22,668.21.
Underneath the surface, volatility was much higher than the small percentage drops suggest. All five days during the week had a difference of over 1%!, with significant intraday movements.
What caused so much volatility last week?: The main culprits were:
1. The possibility of SaaSmageddon, a dystopian future suggesting that AI will kill a large percentage of white collar jobs, with unemployment ratcheting up to 10% in the next 2-3 years. Early in the week, Citrini Research published a 28-page article detailing how white-collar workers would be displaced and that the U.S. economy would become a “ghost GDP” economy dominated by Agentic AI doing the work of white-collar workers. Even though the article was a futuristic science fiction scenario with virtually no rational basis in its projections, markets were skittish enough to overreact, punishing enterprise stocks indiscriminately, such as Salesforce, Workday, and ServiceNow by 5-10%. SaaS or enterprise software contributes about $1.5Tr to the US economy directly and spending from highly paid white-collar professionals contributes a lot more indirectly.
While there are persistent voices supporting that AI will help SaaS, a skittish market is not giving them any support right now. I believe it will take a few quarters.
2. The fear of $2 Trillion in planned capex not achieving enough returns. Ironically the AI beneficiaries of this supposed dystopian future never saw any benefits, either. Nvidia’s brilliant results on 02/24, Wednesday, with over 70% data center growth guidance, instead of fanning “Buy the dip,” saw sellers rush to sell the post-market jump. Perhaps its own success suggests that its best was already priced in and the going had to get tougher from here onwards. The “Peak Nvidia” trade gained traction leading to Friday’s closing of $177.19, a 10% drop from its post earnings surge of over $200.
3. Private lending failures related to “circular” data center projects. In the prior week it was the Blue Owl crisis, where Blue Owl failed to place a portion of its data center loans to raise funds to redeem calls from fund investors. Last week it was the turn of another roach to skid across computer screens: Market Financials Solutions Ltd. This time around the accusations centered on alleged fraud by Market Financials Solutions. The same collateral was used to secure multiple obligations! Its lenders included big fish like Barclays, Wells Fargo and Apollo.
I suspect we’ll continue to see these happen in the next two to three years, and as long as it doesn’t pose a systemic risk to the banking system we should be fine. However, as mentioned earlier, private credit markets tend to be much more opaque with even less compliance so one needs to be extremely cautious for bad news that could be lurking around the corner.
4. Coreweave and Block earnings: Coreweave (CRWV) ended the year with excellent revenue of $5.3Bn and an ARR of $17-19Bn for 2026, which is really fast growth for a cloud service provider. But elevated capex plans of $30B to $35B this year, versus consensus of $26.9Bn spooked investors. Coreweave has a revenue backlog of $67Bn and they simply cannot stop spending. Data centers can’t generate that kind of revenue until they get that much power and GPUs. Anyone investing in data centers knows that, so the reaction was a bit overdone. Coreweave, which is the flag-bearer for neoclouds, has now dropped 30 points from its January high of $110, a 19% drop on earnings day. Nonetheless there is a lesson in it and perhaps a reason for investors to pause.
Block (XYZ) earnings were good but the big surprise was the announcement to reduce 40% of headcount to focus on AI. That is clearly the stuff nightmares are made of and makes the dystopian scenario look real. I believe more layoffs will tip this market into a correction.
The Iran invasion: Another blow to the financial markets.
When it rains it pours: As if there weren’t enough troubles in the market, an invasion in the Middle East from the US is bad enough to start with, but Saturday’s (Feb 28th) bombing of Iran by the US and Israel couldn’t have come at a worse time. The bombing led to the killing of Iran’s supreme leader the Ayatollah Khamenei, and the nightmare of a power vacuum and a worst case scenario of a prolonged boots on the ground quagmire, which usually doesn’t end well for anyone. It will be a while until we get some visibility on any restoration of normalcy, and most analysts predict that things could get worse before they get better. It would be pointless to speculate on scenarios at this stage. No surprise that Futures indicate a drop of 1% at Monday’s opening; Brent crude was about 10-12% higher in over-the-counter trading Sunday to roughly $80 a barrel, and while key shipping routes like the Straits of Hormuz remain open, any signs of a shutting it down or Iran using its oil as a bargaining chip will continue to keep tensions elevated. Another interesting side effect was the possibility of Russia leveraging this to increase its operations in Ukraine. Simply put, the supply of munitions might not be enough for two wars, and should the US focus on Iran and divert supplies there it gives the Russians an opening.
What should we do this week?
Hunkering down, holding on to cash and focusing on defense ETFs is a good enough strategy for now. It is still too early to buy the dip. Three weeks back I went on a selling spree and increased cash to over 30%, which has come down a bit to 26% after investing in neoclouds and data center infrastructure stocks. I suspect this Middle East adventure is in no way an easy fix and will get a lot messier and last longer than imagined. Epstein must be laughing in his grave.
I don’t plan to re-invest it in a hurry. There will be better opportunities later in the year.
Stocks: At present these two defense ETFs, ITA and SHLD could be places to hide in and for Oil and Gas, VDE and XLE can be used till the conflict rages. Healthcare could also be safe.
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