This week in the markets: The AI story turns from positive productivity gains to negative disruption of business models; inflation eases on both sides of the Atlantic; while the market broadening softens the impact of the tech sell-off.

The Dow Jones briefly sat above 50,000 at the start of last week and the S&P 500 is close to its all time high at around 7,000. But the mood in markets has turned more cautious in the past few weeks. The bull market may still be in place, but it feels more fragile.

The main focus has been shifting sentiment about artificial intelligence. The initial euphoria about AI’s ability to lower companies’ costs and enhance their productivity has been replaced more recently by concerns about the new technology’s disruptive impact on a wide range of existing business models.

Latest in the spotlight has been so-called ‘software as a service’ companies, as the big AI companies like Anthropic and OpenAI change their code-generating tools into general purpose agents that can carry out a wide range of actions for non-technical workers. This poses a risk to established software companies that currently provide a wide range of services to companies like HR and customer handling.

In recent weeks, business to business data providers and wealth managers have been caught up in big sell-offs as investors questioned their long-term viability in an AI-dominated world. AI has always been a two-edged sword, but investors have so far focused only on the benefits and not the potential costs. That may be changing.

Markets have been volatile as investors have erred on the side of selling first and analysing second. The sell-offs may well prove to be an over-reaction as people continue to value human to human relationships and software systems are firmly embedded in companies’ operations and changing them tends to be a multi-year process. But in the short-term it has created a febrile atmosphere in markets.

On Thursday last week, the S&P 500 fell 1.6% and the Nasdaq was 2% lower. Big tech led the falls, with Apple down 5%. Softbank, which is heavily invested in Open AI and other technology companies fell 6.5% in Tokyo on Friday. Meanwhile Cisco fell 12% after it missed expectations with its latest earnings.

The Magnificent Seven group of tech stocks, which led the market rally for so long, has moved sideways for the past six months or so and now stands at the bottom of its recent range in a set-up that’s reminiscent of the market peak a year ago in the run up to the announcement of tariffs in April 2025.

Since last summer, the market has broadened out with the S&P 500 equal weighted index usefully outperforming the capitalisation-weighted main S&P index. That has disguised the poor performance of the biggest stocks in the benchmark and prevented them dragging the overall index much lower. It remains to be seen how long that benign scenario can last. Historically, when the biggest stocks in an index fall, they drag the rest lower.

The impact of all this on markets may not be immediately apparent this week as holidays in many countries are keeping investors on the sidelines. The US is closed for President’s Day today while the start of Lent and the Carnival celebrations have shut markets in many south American countries for a couple of days. And in China the New Year holiday will keep trading subdued.

That said, there’s no shortage of economic data to keep an eye on. After last week’s softer than expected US inflation number, it’s the UK’s turn to report on price growth. The consensus is for a cut in inflation from 3.4% in December to 3% in January, the start of what is expected to be a rapid decline to close to the Bank of England’s 2% target by April. Thereafter, inflation should stay close to target for the next few years on the back of elevated interest rates, subdued economic growth and slowing pay rises.

The Bank of England held interest rates at 3.75% in February and financial markets are now pricing in a 60% chance of a quarter point cut in March and a slightly higher probability that the Bank holds fire until April.

The Bank will also take note this week of employment and wages data on Tuesday and retail sales numbers on Friday.

Elsewhere, the focus will be on growth. The US economy has been surprisingly resilient to persistently higher interest rates and trade tariffs. This Friday economists expect a slowing of GDP growth to 2.8% in the final quarter of last year, down from 4.4% in the previous quarter. But even that is considerably more robust than many expected.

In Germany, meanwhile, Tuesday’s release of the ZEW index, an important gauge of investor sentiment and a bellwether of the broader economy, is expected to show a useful uptick to its highest level since June 2021. Germany is expected to finally return to meaningful growth in 2026 on the back of a debt-funded government spending spree, focused on manufacturing and defence.

The mood in equity markets may have softened a bit but in the fixed income markets sentiment remains resolutely optimistic as a rally in corporate bond prices has pushed the reward for taking extra credit risk to historic lows.

Typically, investors demand a higher yield for lending to companies because they are more likely to default than governments. But recently investors have shown a preference for the debt of relatively conservative companies over free-spending governments. That has pushed down the spread between corporate and government bond yields to levels last seen before the 2008 financial crisis.

This is making investors wary, with some describing the behaviour of credit markets as increasingly bubble like. Although the US economy is expected to be run ‘hot’ in the lead up to November’s mid-term elections, boosting growth, analysts warn that tighter yields make corporate bonds increasingly vulnerable to any economic slowdown.