Diverging AI Performance and Trump’s Fed Pick Fuel Market Volatility

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Last week may have been calm in terms of economic data, but a perfect storm of high-stakes events—volatile tech earnings, the dollar index falling to a three-year low on Tuesday only to rally following Kevin Warsh’s nomination as the next Federal Reserve Chair, as well as continued weakness in Bitcoin and Ethereum—fueled large, divergent stock and price movements across asset classes.

These big swings were propelled by a few key areas of uncertainty in the markets and economy. First, on the markets side, a growing divide is emerging between companies successfully monetizing artificial intelligence (AI) and those struggling with high costs. That chasm was highlighted by fourth-quarter earnings last week, as Meta surged nearly 10 percent on Wednesday—adding more than $150 billion to the company's market capitalization following strong AI-driven revenues—while Microsoft suffered its worst single-day drop since 2020 amid a slowdown in growth of its Azure cloud platform. Despite this volatility, the S&P ended the week up 0.34 percent overall, while international stocks rallied 1.56 percent, and bonds remained virtually unchanged.

We have seen this movie before when it comes to AI, and we believe we will continue to see it as the technology continues to evolve and stretches demand for different technology needed to bring it to life. Currently, we are in the midst of memory and data storage melt-up on the back of increased AI demand, which crowned data storage company Sandisk the best-performing stock in the S&P 500 last week, up 22 percent after strong earnings and nearly tripling since December 15.

However, we remind that we have seen similar narratives shift abruptly in the recent past. Recall a few months ago when Oracle surged over 100 percent from its 2025 starting price on the back of a surge in demand for its AI-fueled cloud business only to fall more than 50 percent from its all-time high ($328.33, reached on September 10) as its debt swelled and investors questioned the company’s ability to convert its massive backlog into immediate revenue. Today, the software company’s stock is nearly back to where it was a year ago. The recent sell-off in the software-as-a-service (SaaS) sector comes as another example, the launch of Anthropic’s new “Claude Cowork” AI agent tool in mid-January 2026, led investors to wonder how the arrival of “agentic” AI will disrupt the AI landscape once again.

These extreme moves serve as a reminder that winners and losers can change quickly in today’s technological landscape as AI continues to evolve and the scales of supply and demand required to realize these advances continue to shift.

On the economic side of the equation, uncertainty surrounding monetary policy is also fueling these large market moves. These unanswered questions came into view on Friday as the market digested an impending changing of the guard at the Fed. The selection of Warsh, a former Fed governor who has historically been known for his hawkish views on interest rates, took some by surprise given President Donald Trump’s calls for lower borrowing costs. The S&P 500 fell 0.43 percent as investors weighed Warsh’s more recent support of the president’s calls for lower rates against his historical opposition to quantitative easing. At the same time, Warsh’s nomination led the U.S. dollar to climb 0.89 percent to 97.14, its sharpest single-day increase in months after hitting a three-year low earlier that week on investors’ perceptions of the nominee as an institutionalist who will preserve Fed independence.

At the same time, perhaps tied to the nomination and the dollar’s surge, Friday saw the largest one-day decline for gold and silver since 1980. Silver plummeted by more than 30 percent, while gold fell 11 percent as the prospect of more hawkish, stable monetary policy reduced the perceived need for panic-driven gold hedging against inflation or currency devaluation.

Last week’s Fed meeting remained largely uneventful, as policymakers opted to leave rates unchanged, but big questions continue to loom regarding interest rates following Warsh’s nomination. We continue to believe both the economy and markets remain in delicate balance, with more big price moves inevitable as uncertainty surrounding AI, interest rates and inflation bring more immediate volatility. The way to invest for this is through a steady hand, continuing to focus on intermediate- to long-term fundamentals that are grounded in diversification, and adherence to a financial plan.

Wall Street wrap

Consumer confidence waned in January: The Conference Board’s Consumer Confidence Index fell by 9.7 points in January to 84.5 in January, the lowest level since 2014 in a significant departure from December’s revised higher reading of 94.2. The decline was broad-based, hitting perceptions of present economic conditions as well as expectations for the next six to 12 months. Notably, the Expectations Index dropped by 9.5 points to 65.1, well below the threshold of 80 that usually signals a future recession, reflecting increased pessimism about future economic conditions.

A key takeaway is the significant weakening in the labor market differential—the gap between respondents who say jobs are “plentiful” versus “hard to get.” This differential has narrowed substantially, with 23.9 percent of consumers saying “plentiful,” down from 27.5 percent in December, and 20.8 percent of consumers saying jobs were “hard to get,” up from 19.1 percent. This pushed the labor differential lower to 3.1 percent, down from 8.4 percent in December and 19.4 percent in January 2025. This index has a historically high correlation with the unemployment rate and points to the likelihood of a continued rise in the unemployment rate.

The Conference Board’s Consumer confidence measure, which is more labor market-focused, had held up better than the University of Michigan confidence measure, which is more focused on personal finance and cost of living/inflation. However, both are now experiencing weaknesses. While consumer spending has held steady despite consumers expressing their angst, this is a trend that bears watching.

Services inflation remains sticky, while goods inflation softens: The latest U.S. Producer Price Index (PPI) report shows that wholesale inflation firmed more than expected, underscoring persistent price pressures. Headline PPI for final demand rose 0.5 percent on a month-over-month basis, marking the strongest increase in several months, while the year-over-year pace remained stuck at 3 percent. The data suggests that progress on inflation at the producer level has stalled, even as some disinflation has appeared elsewhere in the economy.

A key driver of the increase was services inflation, which continued to accelerate. Prices for trade services, transportation and other service categories rose notably, reflecting higher margins and labor-related costs. In contrast, goods prices were relatively subdued, with many categories flat or declining. This highlights the ongoing split between softer goods inflation and the more resilient services inflation that has characterized recent data.

Looking at core measures, inflation pressures remain firm. Core PPI, which excludes food and energy, also rose more than expected, up 0.7 percent, and narrower measures that strip out volatile trade services showed continued strength. This indicates that inflation is not confined to a few volatile components but remains embedded across a range of producer inputs, suggesting underlying cost pressures have yet to fully ease. Most important, several measures within the PPI index that feed into the Fed’s preferred measure, Core Personal Consumption Expenditures, point out the potential for an upside surprise in December’s consumer inflation that will be released on February 20.

The week ahead

Monday: ISM Manufacturing Purchasing Managers’ Index PMI (PMI) data for January is scheduled for release at 10 am EST. Last month’s data reflected an overall contraction from 48.2 percent in November to 47.9 percent in December, marking the 10th consecutive month of contraction for this specific index. Interestingly, the ISM manufacturing data painted a slightly conflicting picture of the sector when contrasted with another key manufacturing report (S&P Global US manufacturing PMI), which showed modest expansion. We’ll be watching to see how the latest report compares and whether these mixed signals continue.

Wednesday: The ISM Services PMI (January 2026 data) will follow on Wednesday, February 4, 2026, also at 10 am EST. Last month’s data unexpectedly increased to 54.4 percent, up from 52.6 percent in November and well above analyst forecasts of 52.3 percent in the 10th expansion month of the year for this index. Both the ISM Services and ISM Manufacturing indices serve as leading indicators of economic momentum because they reflect real-time business conditions from supply managers.

Thursday: The Challenger, Gray & Christmas Job Cuts report for January 2026 is expected to be released at 7:30 am EST. In 2025, U.S.-based employers announced 1,206,374 job cuts, according to the firm’s year-end report, a 58 percent increase from the 761,358 cuts recorded in 2024 and marking the highest annual figure since the pandemic year of 2020. U.S. employers also announced 507,647 planned hires last year, down 34 percent from the 769,953 announced in 2024. This was the lowest year-to-date total since 2010, when 402,608 new hires were planned that year. We’ll be watching to see if that ease continued into the start of 2026.

Friday: The U.S. Bureau of Labor Statistics is scheduled to release the January 2026 Employment Situation report, which includes Nonfarm Payrolls, the unemployment rate, average hourly earnings and other labor market metrics, at 8:30 am EST. December’s report showed less job creation than expected, with only 50,000 jobs added in a significant year-over-year slowdown from 2024.

Separately, the University of Michigan will release preliminary February data from its Consumer Sentiment Index at 10 am EST on Friday, February 6, 2026. January’s reading showed a modest improvement in consumer sentiment from 52.9 in December to 56.4, beating forecasts. Overall sentiment remained substantially below 2024 levels, however, reflecting worries over high prices and potential labor market weakening.

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