The AI revolution is reshaping markets and threatening employment in software

A Fundstrat analysis reveals how artificial intelligence is radically transforming the economic landscape. AI is not only revolutionizing the $450 billion software sector but also triggering an unprecedented capital rotation in global markets, creating clear winners and losers.

AI transforms software: a deflationary threat to the economy

According to Fundstrat analysts, the software industry faces an existential crisis. AI is “revolutionizing the software sector,” with job losses expected to accelerate in the coming months. Companies that once “dominated markets” now face a real threat: replacement through AI.

This phenomenon has significant macroeconomic effects. From an inflationary dynamics perspective, AI acts as a “disinflationary” force. Core CPI data show a downward trend, with forecasts dropping to 2.52% annually—returning to pre-pandemic inflation levels from 2017-2019.

The labor market reflects this deflationary pressure. Employment data revisions show significant losses, and financial operators are already asking the crucial question: how many jobs will automation and AI eliminate in the coming years? This question is already influencing capital allocation strategies.

The Federal Reserve moves toward an accommodative policy with Kevin Warsh

Markets initially misunderstood Kevin Warsh’s appointment as Federal Reserve Chair, interpreting it as a hawkish signal. In reality, Warsh favors rate cuts while maintaining a more cautious stance on fiscal policy.

With worsening employment figures and accelerated structural transformation driven by AI, analysts expect a gradual reduction in interest rates. Fed funds levels during 2017-2019 ranged between 1.5% and 2.0%, suggesting ample room for significant cuts from current levels.

Jerome Powell is already accounting for negative employment revisions in monthly reports, aware of upcoming downward adjustments. Financial operators mainly await labor market data not to understand the present but to assess future automation scenarios.

Capital rotation: the true winners beyond the Magnificent 7

Last year, investors focused their capital on the “Magnificent 7” tech giants—Apple, Microsoft, Google, Amazon, Meta, Tesla, and Nvidia. These giants lead the AI revolution and continue to attract significant investment flows.

However, a new phenomenon is emerging: rotation toward companies providing AI infrastructure. Investors are shifting capital toward energy suppliers, industrial producers, electric capacity generators, and chip manufacturers. These “infrastructure providers” are capturing billions in fixed capital investments needed to build AI ecosystems.

In the short term, this rotation is expected to cause a 10-20% correction in the US stock market as capital flows out of the Magnificent 7 into industrial and financial sectors.

Paradoxically, this movement benefits international markets. The Magnificent 7 account for 55% of US stock indices, creating a high concentration in tech. Foreign markets, on the other hand, maintain a weighting toward industrials, materials, and diversified sectors—precisely the areas where global capital flows are now converging.

Bitcoin and Ethereum: fundamentals remain solid

The bullish forecasts made for Bitcoin and Ethereum in January have not materialized in the short term. The crypto market experienced a deleveraging shock in October, exceeding the FTX crash of November 2022.

Two factors interrupted the recovery. First, the October 10 fee announcements triggered chain liquidations. Just as the crypto sector was beginning to recover—recoveries typically follow a V-shaped trajectory lasting 6-8 weeks—new uncertainties caused a cascade of sell-offs. Second, the “fear of missing out” shifted toward gold, draining liquidity from crypto into the precious metal.

Despite the negative environment, the overall sector valuation remains constructive. The fundamentals of blockchain and cryptocurrencies, from a structural perspective, maintain a positive narrative. The mood at the Hong Kong Consensus was pessimistic, with investors struggling to choose between staying exposed to crypto or rotating into gold—a psychological dynamic often signaling excessive downside.