AI Sentiment vs. Market Flow: The Derangement Trade

The market is showing a stark disconnect between business reality and investor mood. S&P 500 futures were down 0.32% this morning after the index fell 0.54% yesterday. This skittishness is concentrated in tech, where Nvidia's record Q4 revenue of $68.1 billion (up 73% year-over-year) did not prevent its stock from dropping 5.46% yesterday.

This is the core of "AI derangement syndrome." The initial optimism that fueled last year's rally has morphed into fear that AI is a job-disrupting force, not a productivity tool. This shift is hitting software and tech stocks hardest, with the equal-weight S&P 500 up 6.7% year-to-date while the tech-heavy Nasdaq is down.

The result is a market punishing strong fundamentals. Nvidia's blowout earnings and massive cash returns are being ignored as sentiment turns negative. This derangement is dragging down the entire U.S. market, making it look feeble compared to foreign peers.

The Flow of Fear and the Stalemate

The fear is spreading beyond pure-play AI. Software, cybersecurity, and IT services stocks are being pummeled as traders worry that AI tools can now write the code for their products. This derangement is a broad-based selloff, dragging down the entire U.S. market.

Capital is fleeing this sector while flowing toward global diversification. The FTSE 100 is up nearly 10%, the STOXX Europe 600 sits at an all-time high, and Japan's Nikkei is up nearly 14% year-to-date. This creates a stark divergence in market flows.

The result is a stalemate. The S&P 500 is up just 0.93% year-to-date, a feeble performance that contrasts with the median analyst forecast of a nearly 12% advance for the year. The market is stuck between a global rally and a domestic slump.

Catalysts and the Path to Resolution

The core trade-off is whether AI's productivity gains can outweigh fears of disruption. Yardeni's team using Claude to write code in minutes is a tangible example of the former. Yet the market's derangement is fueled by the latter-the fear that AI tools can now replace entire software businesses and the jobs within them.

A shift in capital flow back into U.S. tech requires sentiment to stabilize or improve. The current stalemate is clear: the S&P 500 is up just 0.93% year-to-date, a feeble performance that contrasts with the median analyst forecast of a nearly 12% advance for the year. Until the fear of displacement recedes, capital will likely continue to flow toward global diversification.

The broader risk is that derangement persists, allowing foreign markets to extend their lead. The U.K.'s FTSE 100 is up nearly 10%, and Japan's Nikkei is up nearly 14% year-to-date. If the U.S. market misses its 12% forecast, it will not only underperform but also cede ground to a global rally, deepening the sense of a market stuck in derangement.