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AI hype has soured as investors worry about the disruptive impact the technology could have on businesses and the economy, and it's got the market on edge about where the panic could crop up next.
The tech sector has been hit the hardest. The software sell-off sparked by recent updates from Anthropic and worries about a labor-market disaster scenario presented by Citrini have only added fuel to the fire. Even Nvidia earnings couldn't shake investors out of their AI fear funk.Business Insider spoke with three investing professionals to assess the question weighing on investors minds: What's next for the AI trade?"It's kind of amazing to me how violent the sell off has been," John Belton, a Gabelli portfolio manager focused on growth names, told Business Insider."Everybody's just kind of walking on the tightrope, waiting for the shoe to drop," Futurum CEO and principal analyst Daniel Newman said.Freedom Capital Markets' head of tech research, Paul Meeks, who has more than 30 years of investing experience, said he went from expecting tech outperformance in 2026 to expecting the sector to lag the broader S&P 500. Here are four big takeaways from top investing experts.The private credit space has caught investors' attention, and Newman said he thinks there is reason to worry."I still think there's a bit of a death bomb in private credit," the analyst said."We've seen it with Oracle, where there's just concern about how they're going to continue to raise capital to their capex," he added, noting that the private debt could cause a near-term slowdown.Concerns about private credit were reignited by headlines around Blue Owl Capital, with economist Mohamed El-Erian and JPMorgan's Jamie Dimon stating that they thought the headlines reports swirling around the firm were reminiscent of 2007, just before Great Financial Crisis.Worries about Blue Owl have compounded other anxieties in the market as software gets hammered and concerns arise in the data center space. "There's going to be continued controversy about AI will never make any money," Paul Meeks said, explaining he expects pressure on lenders funding AI buildouts will continue. "The reason that they get the business is some of these guys can't get money from a bank," the analyst said of the private lending market. Investors have zeroed in on Blue Owl and other firms' exposure to AI, but big banks aren't immune to the problems, sources said. Big financial institutions have also gorged on private credit in recent years, syndicating debt in the leveraged loan market and facilitating financing via CLOs.Meeks signaled that banks could be especially vulnerable to investorss worries, with comparisons to 2007 signaling moutning stress. Beyond private credit, banks are also at risk of AI disruption themselves. "Maybe banks are just a broader candidate for disruption that hasn't really been built in yet. I mean, banks are exposed to the labor market, not so much like a new AI company creating a bank, but there's indirect exposure if the labor market turns," Belton added.He indicated that the market may not be pricing in the banking space's exposure to AI on multiple fronts, noting that the current environment has been "very favorable" to banks, leading stock valuations to become stretched. Physical AI, meaning AI systems that interact in the physical world like automated machinery or self-driving cars, is expected to be a significant frontier for technology.Citi projects the total addressable market for warehouse-automation systems alone will grow to $112 billion by 2029. The analysts say that automated guided vehicles and autonomous mobile robots present significant use cases for physical AI.Paul Meeks expects opportunities around physical AI to be "fast and furious." It presents a big opportunity for companies that successfully adopt it and a "super threat" to those who don't, he said.The analyst flagged the industrials and transport sectors as areas of the stock market that could be disrupted by innovation in physical AI.As investors have moved out of tech, it has accelerated an ongoing market rotation into cyclical plays. This rotation could leave investors more exposed to physical AI disruption within industrials.Belton suggested the current preference for cyclical plays like consumer staples and industrials could end up backfiring, and saif that some stocks are being perceived as "immune to AI," stretching their valuations. It's creating a "vulnerable pocket of the market" if AI does fuel major economic disruption.Software has been one of the hardest-hit areas during the recent tech sell-off. Newman expects that the sub-sector will bounce back, but it won't be an even recovery.He thinks that application software companies that went public during the SaaS craze and are focused on specific features are likely to be consolidated into a larger platform or eliminated entirely. He named Expensify and Monday as examples.Newman sees software names without a data moat, not part of a larger platform, or otherwise exposed to agentic AI replacement, at risk of further declines before sentiment bounces back.
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