Notes from the Trading Desk

Market Movers & Shakers

Major U.S. equity indices pulled back last week, extending recent losing streaks. The S&P 500 fell for a second straight week, the Nasdaq Composite slid for a fifth straight week, and the small-cap Russell 2000 posted its third decline in the past four weeks. Beneath the surface, the rotation trade remained in motion, with the equal-weight S&P 500 outpacing its cap-weighted counterpart by nearly 170 basis points as money continued to flow out of mega-cap tech and into more cyclical pockets on the market. That dynamic was reflected at the sector level last week, where Utilities, Real Estate, Materials, and Energy were the top performers while Financials, Communication Services, Consumer Discretionary, and Information Technology bore the brunt of the selling pressure.



Source: The Compound Media, data via Bloomberg Finance, L.P.

One of the more notable features of the current market environment is the surge in single-stock volatility. The chart above, which tracks S&P 500 maximum drawdown alongside instances where 115 or more stocks fell at least 7% in a single day over a rolling eight-day window, tells a compelling story. Historically, those red dots, signaling instances of individual stock stress, have clustered during periods of significant market-wide distress, such as the dot-com bust, the Global Financial Crisis, and the COVID crash, all of which saw the S&P 500 drawdown well in excess of 20%. The average peak-to-trough decline across all such instances is -34%. What makes the current market notable is that we are seeing a meaningful surge in single-stock blowups while the index sits at only a -2% drawdown from its highs. In other words, while surface level volatility appears calm (VIX at ~20), individual stocks are experiencing the kind of violent single-day moves that have historically occurred during bear markets.

Last week, the AI displacement narrative took on a life of its own, mowing through one industry after another in a rolling succession of “AI Reaper” trades that left investors firmly in “sell first, ask questions later” mode. The month had already opened with weakness in enterprise software stocks, as Anthropic launched a Claude coding tool that sparked a sharp selloff in the iShares Expanded Tech-Software Sector ETF (IGV). But last week, the selling became more indiscriminate across industries deemed ripe for displacement. Monday brought insurance brokers into the crosshairs after a Spanish online insurer, Tuio, unveiled an app powered by ChatGPT that collects information during a conversation with consumers researching insurance and then gives them an instant quote. Shares of Aon, Arthur J. Gallagher, Brown & Brown, and Marsh & McLennan declined by ~7% or more on Monday, while Goosehead Insurance (which has more consumer exposure) lost roughly a quarter of its value between Monday and Tuesday’s trading sessions. On Tuesday, the main victims of the “AI Reaper” were wealth management stocks, triggered by fintech firm Altruist’s announcement of an AI tool capable of generating personalized tax strategies by interpreting financial documents without manual entry. Raymond James shares suffered their worst single-day decline since the COVID crash in March 2020, declining 8.7%, while Ameriprise, LPL Financial, Schwab, and Morgan Stanley shares experienced outsized selling pressure. By Wednesday, property managers and commercial real estate services stocks were in the line of fire, with shares of CBRE, Jones Lang LaSalle, and Cushman & Wakefield all posting double-digit declines as market participants questioned the future of knowledge-sector middlemen. Concerns were further exacerbated following comments made by Microsoft’s AI Head, Mustafa Suleyman, to the Financial Times suggesting that most white-collar job tasks will be fully automated within 12 to 18 months. Those comments sparked a selloff in some of the largest publicly traded office REITs like Boston Properties, Alexandria Real Estate, and Vornado Realty as investors feared the demand for office rentals could fall in the future.



Source: FactSet

The “AI Reaper” trades continued on Thursday, which brought one of the week’s more puzzling developments. Transportation and logistics broker stocks plummeted, with C.H. Robinson down ~15%, Expeditors International down ~13%, and Landstar System down ~16% for its worst single day decline ever. Trucking stocks were also taken out in the wave of selling, with J.B. Hunt and Old Dominion Freight shares down 5% and 4.6%, respectively. At the end of the trading session on Thursday, the Dow Jones Transportation Average was down 4%, with 17 of its 20 components finishing in the red and the group collectively shedding $17.4 billion in market cap. The catalyst for such sharp declines? A pre-market press release from Algorhythm Holdings touting new AI technology capable of boosting trucking efficiencies. If you have never heard of Algorhythm Holdings, it’s likely because the company, formerly known as the Singing Machine Company, sports just a $3 million market cap and up until late last year sold karaoke machines. The fact that a company of that size and profile could ignite that scale of selling speaks volumes about how far markets may be overshooting AI disruption fears.



Source: Bloomberg

Friday offered a modest reprieve from selling pressure, with software stocks staging a tepid bounce. Several large Wall Street firms have come out with recent notes calling the recent software selloff overdone. Goldman Sachs noted that software positioning is at record lows, making up less than 3% of total U.S. net exposures. JPMorgan Chase strategists see the potential for a rebound based on the “overly bearish outlook on AI disruption and solid fundamentals”. HSBC argued that incumbent enterprise software players are insulated by proprietary data and an inherent need for system exactness and reliability, allowing them to use AI as a complementary tool for growth rather than being displaced by it. Jefferies analysts wrote in a note to clients that of the 64 software stocks under their coverage that “42% are trading at or close to their historical low valuations”. The selloff that has accelerated in recent weeks has certainly reset valuations. The S&P North American software index traded below 20 times forward earnings last week for the first time. Despite all of the pessimism and fears that software is on a straight line to zero, earnings expectations have remained broadly intact for the group. The software and services subsector is projected to deliver earnings growth of about 14% in 2026, according to Bloomberg, which exceeds the 13.7% earnings growth forecast for the broader S&P 500 index.

Updates & News*

In the February 2026 edition of Observations, Tandem’s Co-Chief Investment Officer, Billy Little, noted the following:

For Tandem, this environment should ultimately create conditions where our investment approach is once again favorably recognized by the market. At some point the market will appreciate those “old economy” companies that manage to consistently grow revenues, earnings, cash flows and dividends, if paid. While these companies may currently sit outside the primary leadership cohort, their fundamental trajectories remain intact. As relative valuations for many of these businesses continue to compress, the forward return profile is gradually becoming more compelling. This should position us to methodically add to existing core holdings and, where fundamentals and valuation align, initiate new positions.

Well, the recent surge in single-stock volatility along with indiscriminate selling in certain areas of the market compressed valuations in a handful of businesses to levels that our process suggest are unsustainably undervalued over the long run. So far this month, we have had the opportunity to increase positions in Automatic Data Processing, Broadridge, Intuit, Microsoft, and Verisk Analytics in our Equity and Large Cap Core strategies. We also incepted a new position in Nasdaq in both strategies. In our Mid Cap Core strategy, we added to existing positions in Broadridge and Verisk Analytics, and incepted new positions in Nasdaq and Paychex.

On the transition level, new manager-traded accounts and deposits that have been with Tandem for two weeks are roughly 1/3rd of the way invested. After a month, new accounts and deposits are just over 50% of the way transitioned, and by the three-month mark new money is ~75% of the way in-line with our strategies. In portfolio news, NextEra Energy announced a 10.0% increase to its quarterly dividend last week, while Brown & Brown announced a $250 million accelerated share repurchase program.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.