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Founded in 2017 by former Texas Instruments executives, Astera Labs (ALAB) designs semiconductor-based connectivity solutions for AI infrastructure and data centres. Its specialized chips enable more efficient communication between GPUs, CPUs, memory, and networking components within server racks. Astera Labs is therefore directly exposed to the bottleneck that is shifting from compute to connectivity in the AI ecosystem: its Scorpio (fabric switches), Aries (PCIe retimers), and Taurus (smart Ethernet cables) products are at the heart of this transition.
Key Developments This Week
1) A sharp decline … despite results that beat expectations
The stock fell approximately 21% on Wednesday (February 11), dropping from US$182.86 to roughly US$143.75 at the close. The sell-off was not triggered by poor numbers, results beat consensus across the board, but by a combination of factors:
• The departure of CFO Mike Tate
• Concerns about the margin trajectory (linked to a stock purchase warrant issued to Amazon for ~US$466 million, which will compress gross margins by approximately 2 points per quarter starting in Q2 2026).
• Very high expectations among some analysts who were hoping for revenue above US$280 million.
When a stock has risen over 390% from its September 2024 low, the bar is extremely high, and the slightest perceived disappointment is enough to trigger a rapid repricing.
In other words, the market had already priced in a near-perfect scenario: continued hypergrowth, expanding margins, and undisputed leadership in AI connectivity. When expectations reach that level, even an excellent quarter can trigger profit taking if management message contains the slightest nuance.
2) Latest Quarter (Q4 2025): Record Results
Astera Labs delivered a record quarter:
• Revenue: US$270.6 million, up 92% year-over-year and 17% sequentially
• Adjusted EPS: $0.58 (above expectations of $0.51, a +14% surprise)
• GAAP net income: US$45 million, up 82% year-over-year
• Non-GAAP gross margin: 75.7% (down 70 basis points sequentially, due to a higher hardware mix) • Full-year 2025: record revenue of US$852.5 million, up 115% year-over-year; GAAP diluted EPS of $1.22
• Cash and marketable securities: US$1.19 billion at quarter-end
Key products:
• Scorpio (fabric switches): exceeded 15% of sales in 2025, driven by the P-Series; the X-Series is entering production and is expected to become the largest product line
• Taurus (Ethernet cables) + Scorpio combined: 30% of quarterly revenue.
As CEO Jitendra Mohan emphasized: “Increasingly, the bottleneck is shifting from computing to connectivity, and connectivity is where we play.”
3) Outlook (Q1 2026): Solid, but Margins are a Concern
Astera Labs guided for Q1 2026 revenue of US$286 to US$297 million, well above market expectations (~US$259 million):
• Adjusted EPS expected: between $0.53 and $0.54
• Non-GAAP gross margin: expected to decline to approximately 74%, partly due to the Amazon warrant
• Non-GAAP operating expenses: between US$112 and US$118 million (up, reflecting accelerated R&D investment, including the new centre in Israel).
It is this point, margins, that weighed most on the stock, with some analysts concerned that the growing relationship with Amazon will compress profitability as volumes increase.
Why This Is a Stock to Watch
1) The decline is mainly driven by valuation and positioning, not by the numbers
When a stock trades at ~150x trailing earnings and has surged +390% in 16 months, the market no longer rewards just “good”: it must be “perfect.” The 21% drop therefore looks more like a normalization after strong anticipation than a signal that the company is in trouble:
• Citigroup lowered its target to $250 (maintains “Buy”)
• JPMorgan reiterates “Overweight” with a $205 target
• 18 out of 18 analysts maintain a buy recommendation
2) The AI connectivity engine is accelerating
At US$270.6 million per quarter and growing rapidly, the AI connectivity segment shows that the momentum is tangible:
• Astera Labs’ addressable market is expected to grow 10x to reach US$25 billion over the next five years.
• Strategic partnerships with Nvidia, AMD, Intel, Amazon, Google, and Microsoft
• The company’s central positioning in the AI ecosystem is strengthening as bandwidth becomes the limiting factor
3) The “bottleneck is shifting” thesis: still intact
The narrative that drove Astera Labs’ rise remains relevant and is strengthening:
• Connectivity as the next critical bottleneck in AI infrastructure
• The quarter confirms that the operational base is progressing rapidly
• The market’s concern is mainly about medium-term margins and dilution from the Amazon warrant, not about growth
4) Portfolio discipline: having trimmed before, then bought back at the dip
We had reduced our position ahead of the earnings release due to elevated volatility and the stock’s significant appreciation. This discipline allowed us to protect accumulated gains. Following Wednesday’s 21% decline, we bought back shares at a significantly more attractive price. Adding in this context aims to improve the risk/return profile:
• Results confirm execution
• The correction reduces the valuation premium
• The structural thesis (AI connectivity + data centres) remains in place
Conclusion
We first trimmed our position ahead of earnings, a decision driven by caution toward a stock whose valuation already reflected a very optimistic scenario after a rise of over 390% in 16 months. This discipline paid off: Wednesday’s 21% drop confirmed that the slightest grain of sand—CFO departure, slight margin compression, revenue below the most aggressive expectations—was enough to trigger a sharp correction.
We then made the decision to buy back at the dip. In our view, this correction created a more attractive entry point and improved the risk/return profile of a high-quality company, well positioned on a structural trend (connectivity as the next bottleneck of AI). The Q4 results, record revenue of US$270.6 million (+92%), EPS of $0.58 beating expectations by 14%, and Q1 2026 guidance above consensus demonstrates that the operational trajectory is intact. The analyst consensus (18 “Buy” out of 18, average target ~US$203) supports this reading.
We are comfortable with this trim/buyback sequence: the operational trajectory remains consistent, the addressable market is expanding (US$25 billion within five years), and we will continue to closely monitor the key milestones—the Scorpio X-Series production ramp, margin evolution tied to the Amazon warrant, and the transition to optical solutions expected around 2028 while maintaining disciplined risk management.
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Market Brief
Monday
• Dow Jones: 50,135.87 (+0.04%)
• S&P 500:6,964.82 (+0.47%)
• Nasdaq: 23,238.67 (+0.90%)
• S&P/TSX (Toronto): 33,023.32 (+1.70%)
Canadian Dollar: 0.7366 US$ (up vs. 0.7292 US$ Friday)
Monday opened with a continuation of last week’s momentum, as the Dow Jones held above 50,000—the historic threshold crossed for the first time last Friday. The session was driven by selective buying in technology, with a clear emphasis on AI infrastructure names rather than a broad-based tech rally.
Nvidia gained 2.5%, Broadcom 3.3%, and Oracle surged 9.6% after D. A. Davidson upgraded the stock and reports of expanded partnerships with OpenAI surfaced. In contrast, the software sector remained under pressure, extending the “SaaSpocalypse” narrative from the prior week: investors continue to favour AI infrastructure plays (chips, data centres, cloud) while selling software names perceived as vulnerable to AI disruption.
A key macro theme is the broadening of the market rally. JPMorgan and BTIG both highlighted that small-cap leadership looks durable, with the Russell 2000 up over 8% year-to-date versus roughly 2% for the S&P 500. The equal-weight S&P 500 has also outperformed the cap-weighted version, suggesting that the rally is no longer a “Magnificent Seven” story. For portfolios, this is an important signal: participation is widening, and sectors like industrials, financials, and traditional consumer names are picking up the slack.
On the macro front, the New York Fed’s inflation expectations survey showed a decline to 3.1%, a reassuring data point for rate-sensitive investors. However, the January employment report—originally scheduled for Friday, February 6 was postponed due to the partial government shutdown, removing a key data point for the week and leaving the market without a fresh read on the labour market.
In Canada, the TSX posted a strong gain of 1.70%, buoyed by a firmer Canadian dollar and strength across materials, financials, and energy. The TSX continues to benefit from its more diversified sector mix, less dependent on the large-cap tech names under pressure south of the border.
Stocks in Brief
• Hims & Hers (HIMS): -16%—Novo Nordisk filed a patent lawsuit seeking to ban Hims from selling compounded copies of Wegovy and Ozempic. The FDA also warned it would take “decisive steps” to restrict unauthorized GLP-1 compounds. Hims called the suit “a blatant attack” but pulled its copycat Wegovy pill over the weekend.
• Monday.com (MNDY): -21%—third consecutive post-earnings sell-off, as the market increasingly doubts SaaS business model sustainability in the AI era. Revenue beat, but forward guidance was perceived as insufficient.
• Kyndryl (KD): -55%—accounting crisis: the CFO and general counsel departed immediately, the company delayed its quarterly filing pending an internal review of accounting practices, and financial guidance was slashed. Roughly $3 billion in market cap erased in a single session. Multiple law firms announced class-action investigations.
• Cleveland-Cliffs (CLF): -17%—overbought heading into earnings; narrower-than-expected Q4 loss but revenue missed.
• Kroger (KR): +7.6%—strong defensive positioning rewarded as investors rotated into consumer staples.
• Oracle (ORCL): +9.6%—D. A. Davidson upgrades and OpenAI partnership reports fuelled a sharp rally.
Sector Performance
Monday’s session highlighted a clear distinction: AI infrastructure (chips, data centres, cloud hardware) continues to gain, while software/SaaS is losing ground. But the more important story is the broadening of market participation. Small caps, the equal-weight S&P 500, and traditional sectors (industrial, financials, consumer staples) are outperforming, suggesting the rally is healthier and more sustainable than when it was concentrated in a handful of mega-cap tech names. In Canada, Toronto’s sector mix, heavier on commodities and financials, lighter on software—continues to provide relative shelter from the AI-disruption narrative weighing on U.S. tech.
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Tuesday
• Dow Jones: 50,188.14 (+0.10%)
• S&P 500:6,941.81 (-0.33%)
• Nasdaq: 23,102.47 (-0.59%)
• S&P/TSX (Toronto): 33,256.83 (+0.71%)
Canadian Dollar: 0.7383 US$ (up vs. 0.7366 US$ Monday)
Tuesday, the U.S. market showed a split personality. The Dow Jones posted a third consecutive intraday record, touching 50,398 during the session, and a new closing high, but the S&P 500 and Nasdaq pulled back, weighed down by two distinct forces: disappointing retail sales and a new wave of AI disruption fears, this time aimed at the financial sector.
December retail sales came in flat month-over-month (US$735 billion), well below the expected 0.4% increase, following a 0.6% gain in November. When prices keep rising, flat sales in dollar terms suggest a decline in real volumes. The data fuelled a bond rally: the 10-year U.S. Treasury yield slipped to 4.14% (from 4.20% the day before), its lowest in a month, and the market slightly increased the odds of a third-rate cut in 2026 two already being fully priced in.
But the standout story of the session was the spread of AI disruption fears beyond software. Fintech platform Altruist launched an AI-powered tax planning tool (Hazel), capable of generating personalized tax strategies in minutes from tax returns, pay stubs, and financial statements. The market reacted harshly: LPL Financial dropped 8.3%, Charles Schwab fell 7.4%, Raymond James sank 8.7%—their worst days in months. Morgan Stanley also declined over 2%. As Anthony Saglimbene of Ameriprise Financial put it: “There seems to be a rotation toward other sectors that could be more insulated from this AI dynamic.” The market’s reflex has become almost Pavlovian: as soon as an AI tool threatens a new segment, the most exposed names are sold off en masse.
On the Fed front, two officials sent a cautious message. Dallas Fed President Lorie Logan said rates may not need to come down further, judging current monetary policy “very close to neutral.” Her Cleveland counterpart, Beth Hammack, echoed the sentiment, indicating she prefers to “err on the side of patience” and that rates could stay at their current level “for quite some time.” Both are voting members this year.
On the earnings front, the session was rich in contrasts. Spotify delivered an exceptional quarter: EPS of €4.43 versus €2.74 expected, revenue of €4.53 billion, 751 million monthly active users (+11%), and a record gross margin of 33.1%. The stock surged roughly 15%, its best day since 2019. Conversely, Coca-Cola disappointed with revenue of US$11.82 billion versus US$12 billion expected—its first revenue miss in exactly five years, dragged down by North American concentrate sales up only 1%. Marriott also missed earnings expectations, with a 1% decline in North American occupancy, weighed down by the budget paralysis. And CVS Health fell 3% after lowering its cash flow forecast from US$10 billion to US$9 billion.
In Canada, the Toronto Stock Exchange continued its advance with a 0.71% gain, supported by a firmer Canadian dollar. The TSX continues to benefit from a more diversified sector mix, less exposed to the turbulence hitting U.S. software and tech.
Stocks in Brief
• Spotify (SPOT): +15%—record quarter, EPS crushing expectations, 751 million users. Best day since 2019.
• LPL Financial (LPLA): -8.3%—plunge after Altruist’s AI tax planning tool launch; fear of disruption to the wealth management model. • Charles Schwab (SCHW): -7.4%—same AI fear dynamic as LPL.
• Raymond James (RJF): -8.7%—worst day since March 2020; the brokerage sector in the crosshairs.
• Coca-Cola (KO): -0.91%—revenue below expectations for the first time in five years; soft North American demand.
• CVS Health (CVS): -3%—cash flow guidance reduced, despite an above-expectation quarter.
• DuPont (DD): +2.9%—results and guidance above expectations.
• TSMC (TSM): +3% — record monthly revenue in January, up 37% year-over-year.
• Costco (COST) / Walmart (WMT): -2% / -1%—pressure following disappointing retail sales.
• Datadog (DDOG): +15%—results above expectations, driven by demand for cloud security and AI.
• Vertiv (VRT): +15%—2026 guidance above expectations; the data centre market keeps pushing.
Sector Performance
Tuesday’s session illustrates the spread of the “AI disruption” narrative: after software last week, it’s the financial sector and wealth management that found themselves in the line of fire. The market’s reflex is the same—sell first, ask questions later. Several analysts judged the reaction overblown, but psychology being what it is: when a new segment is targeted, the correction is immediate and often disproportionate.
Notable fact: 61 S&P 500 stocks hit new 52-week highs on Tuesday, including Caterpillar, Cisco, Hilton, and Verizon. This confirms that the market’s advance is broadening beyond tech, even as headlines are dominated by sector-specific sell-offs.
Meanwhile, earnings continue to show a two-speed economy: companies that execute well (Spotify, Datadog, Vertiv) are rewarded, while those that disappoint even slightly (Coca-Cola, CVS) are punished. In Canada, Toronto remains in a relatively comfortable position, benefiting from its exposure to commodities and financials—sectors less vulnerable to the AI disruption theme for now.
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Wednesday
• Dow Jones: 50,121.40 (-0.13%)
• S&P 500:6,941.47 (-0.00%)
• Nasdaq: 23,066.47 (-0.16%)
• S&P/TSX (Toronto): 33,254.19 (-0.01%)
Canadian dollar: 0.7402 US$ (stable vs. 0.7383 US$ Tuesday)
Wednesday, the markets played yo-yo. The session opened on a tear—Dow +207 points, S&P +0.6%, Nasdaq +0.8%—after an employment report that came in far stronger than expected. Then the enthusiasm deflated and all three indexes finished in the red, albeit marginally. The Dow snapped its streak of three consecutive records.
The long-awaited January’s employment report—delayed by the partial government shutdown that ended on February 3—revealed 130,000 jobs created, more than double the 55,000 expected. The unemployment rate fell to 4.3% (vs. 4.4% expected), and December was revised downward to 48,000. It was the strongest job growth in over a year. Art Hogan, chief strategist at B. Riley Wealth, called the numbers, “unambiguously good news.”
But the market quickly found reasons for concern. First, job growth remains very concentrated: 124,000 of the 130,000 new positions came from the healthcare sector—double the normal pace for 2025. Second, monthly revisions for 2025 were systematically downward, with an actual average of only 15,000 jobs per month after adjustments. Third, and most importantly, the strong report pushed bond yields higher and delayed rate cut expectations from the Fed. The market now anticipates the next cut in July rather than June. As Brad Smith of Janus Henderson summarized: “The Fed will factor this into its calculus. With its wait-and-see, data-dependent stance, this will surely tip the balance toward a hold.”
The AI infrastructure vs. software divide widened further. Vertiv surged 24% after solid results and 2026 guidance that blew past expectations—projected revenue of US$13.25 to US$13.75 billion (vs. the market’s US$12.39 billion) and adjusted EPS of US$5.97 to US$6.07 (vs. US$5.33 expected). The order backlog hit a record US$15 billion, confirming that AI infrastructure demand is not letting up. Micron jumped 9.9%, Lam Research 3.8%, Applied Materials 3.3%, and Nvidia 0.8%. On the other side, software suffered again: Salesforce fell 4.4%, ServiceNow 6%, Intuit 5.2%, and Palantir 2.7%. The iShares Expanded Tech-Software ETF (IGV) lost 3%, bringing its decline to nearly 30% below its 52-week high. The fund has been in official bear market territory since last month.
In Canada, the TSX finished essentially flat (-2.64 points), pulling back from its record of the day before. Shopify was the main drag, dropping 7% despite record revenue of US$3.67 billion in Q4 (+31% year-over-year) and the announcement of a US$2 billion share buyback program. The sticking point: adjusted EPS of US$0.48 missed expectations of US$0.51, and free cash flow margin guidance for Q1 2026—in the low-to-mid teens—disappointed. Constellation Software fell 4.7% and CGI dropped 6.8%. On the flip side, commodities supported the index: oil climbed back above US$65 per barrel, and gold approached US$5,100 per ounce. Canadian Natural Resources rose 4%, Suncor 2.6%, and Cenovus 4%.
Stocks in Brief
• Vertiv (VRT): +24%—explosive 2026 guidance; record order backlog of US$15 billion. The AI data centre market is not slowing down.
• Micron (MU): +9.9%—HBM memory shortage; Morgan Stanley raises target to $450. AI semiconductors remain the king segment.
• Shopify (SHOP): -7%—record revenue but EPS below expectations, disappointing cash flow margins for Q1 2026. The market does not forgive.
• Salesforce (CRM): -4.4%—AI pressure on SaaS software won’t let up.
• ServiceNow (NOW): -6%—same AI disruption theme; the IGV ETF is in official bear market territory. • Zillow (Z): -17%—Q4 results below expectations; worst day in four years.
• Caterpillar (CAT): +4.3%—record results and demand supported by AI/data centres; all-time high.
• Moderna (MRNA): -10%—FDA refuses to review its application for an experimental flu vaccine.
• Humana (HUM): -6.7%—decline despite above-expectation results.
• Robinhood (HOOD): -7%—Q4 revenue below expectations (US$1.28B vs. US$1.34B expected); disappointing transaction revenue.
• Lyft (LYFT): -17%—disappointing Q1 guidance despite in-line bookings.
Sector Performance
Wednesday’s session perfectly crystallizes the current market: a solid employment report that would normally propel indexes upward turned into a double-edged sword. Good news for growth, bad news for rate cuts. The market oscillates between two scenarios—soft landing or prolonged restrictive rates—and can’t make up its mind.
The AI infrastructure vs. software divergence is reaching an extreme level. Vertiv and Micron celebrate while Salesforce and ServiceNow sink. Eight of the eleven S&P 500 sectors finished higher on Wednesday—energy, consumer staples, and materials leading—but concentrated losses in software and mega-cap tech were enough to drag indexes down. Market breadth remains healthy; it’s the composition of the indexes that masks reality.
In Canada, the dynamic is similar: Shopify’s weight (-7%) wiped out the gains from oil and gold producers. The TSX illustrates this tension between the “new economy” under pressure and the “old economy” making a comeback.
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Thursday
• Dow Jones: 49,451.98 (−1.34%)
• S&P 500:6,832.76 (−1.57%)
• Nasdaq: 22,597.15 (−2.03%)
• S&P/TSX (Toronto): 32,465.28 (−2.37%)
Canadian Dollar 0.7350 US$ (down from 0.7402 US$ on Wednesday)
Thursday was a heavy session, and the sell-off spread well beyond technology. All three major U.S. indexes opened higher, then reversed a pattern sharply that has now repeated two days in a row and speaks to a market that remains deeply uncertain about its footing. The Dow lost 669 points, and the Nasdaq dropped over 2%, led lower by a combination of AI disruption fears, disappointing economic data, and continued profit-taking in the most crowded trades.
The most striking development of the day was how far the AI disruption narrative has now spread. After software stocks in recent weeks and financial stocks earlier this week, the fear now reached the trucking and logistics sector C.H. Robinson and RXO each plunged more than 20% following the release of an AI-powered freight optimization tool by Algorhythm Holdings. And for the first time, real estate stocks became collateral damage: CBRE tumbled 13.5%, its worst day outside of the pandemic and the 2008 financial crisis, on the logic that AI-driven unemployment would reduce demand for office space. The market’s reflex is clear: investors are systematically screening every sector for AI disruption exposure, and selling first, asking questions later.
Technology remained under heavy pressure. Cisco dropped 12% after in-line guidance failed to meet the market’s elevated expectations. Apple fell 5% its worst day since April dragged down by reports of testing issues with its Siri AI upgrade and fresh FTC scrutiny over its Apple News platform. Nvidia lost 1.6%, Meta shed 2.8%, and the broader software sector continued its slide: Palantir fell nearly 5%, Autodesk dropped about 4%, and the IGV software ETF is now 31% below its recent high, firmly in bear market territory.
On the macro front, the data added to the unease. Existing home sales plunged 8.4% in January far worse than the 4.6% decline expected confirming that the housing market remains stuck. Weekly jobless claims came in at 227,000, slightly above expectations, but the overall picture is one of gradual softening without collapse. Meanwhile, bond yields fell meaningfully: the U.S. 10-year dropped to 4.10% from 4.17% the day before, as investors rotated toward safety ahead of Friday’s all-important CPI inflation report.
Silver experienced a brutal sell-off, plunging 10% in a single session, a clear sign that the risk-off mood extended beyond equities. After surging to a record above US$117 per ounce earlier this year, silver has now fallen 11% over the past month, and the momentum trade that had attracted retail investors appears to be unravelling.
In Toronto, the session was equally painful. The TSX lost 2.37%, or 789 points, dragged down by base metals and technology. The Canadian dollar weakened to 73.50 cents US, down from 74.02 cents the day before, as risk-off flows strengthened the greenback.
On a more positive note, some individual names bucked the trend: McDonald’s rose 2.7% on strong Q4 results (revenue up 9.7% to US$7 billion, beating estimates), and Crocs surged 19% after posting better-than-expected earnings and guidance. Consumer staples and utilities led the S&P 500 sectors, rising over 1% each, with staples reaching a fresh record close, a textbook defensive rotation.
Stocks in Brief
• Cisco (CSCO): −12% — in-line quarterly guidance disappointed in the context of elevated AI expectations; all major brokerages maintained buy ratings, calling the reaction overblown.
• Apple (AAPL): −5% — worst day since April; reports of Siri AI upgrade testing issues plus FTC scrutiny of Apple News.
• C.H. Robinson (CHRW): −20%+ — trucking and logistics stocks hammered by AI freight optimization fears following Algorhythm Holdings’ SemiCab tool launch.
• RXO: −20%+ — same dynamic; J.B. Hunt −9%, XPO −7.9%, Expeditors −16.5%.
• CBRE: −13.5% — AI disruption fears spread to real estate; worst day outside of Covid and the 2008 financial crisis.
• AppLovin (APP): −18% — plunged despite beating both earnings and revenue estimates; broader software sell-off overpowered the positive results.
• Palantir (PLTR): −5% — year-to-date retreat now exceeds 27%.
• McDonald’s (MCD): +2.7% — strong Q4 beat on both lines; plans for more restaurant openings.
• Crocs (CROX): +19% — Q4 results and guidance well above expectations.
• Restaurant Brands International (QSR): −6.2% — modest Q4 beat, but rising beef costs squeezed margins.
Sector Performance
The session was a case study in defensive rotation. Consumer staples and utilities both gained more than 1% and led the S&P 500. Meanwhile, technology, real estate, industrials (via logistics), and financials all came under heavy pressure. The AI disruption narrative continues to widen in scope after software, then financial services, then trucking/logistics, and now real estate. The market is repricing whole sectors on the fear that AI will reshape their economy. The key question is whether this is a rational repricing or a panic-driven overshoot. In the meantime, silver’s 10% crash and the steady bid for defensive stocks paint a clear picture: the market is in risk-off mode heading into Friday CPI report.
In Canada, base metals and technology led the decline, while energy held up better. The TSX’s 2.37% drop was its worst session in several weeks, and the Canadian dollar’s retreat reflects the broader flight to the greenback.
________________________________________Friday
• Dow Jones: ~49,450 (flat early in the session)
• S&P 500: ~6,833 (flat)
• Nasdaq: ~22,600 (flat)
The most anticipated report of the week finally arrived Friday morning: the U.S. January Consumer Price Index (CPI). And the good news is that inflation slowed more than expected. Headline CPI rose 0.2% month-over-month and 2.4% year-over-year, versus forecasts of 0.3% and 2.5%, respectively. It is the slowest annual pace since May 2025. Core CPI (excluding food and energy) came in line with expectations at 0.3% month-over-month and 2.5% year-over-year, its lowest level since March 2021.
Under the hood, the details are constructive. Energy fell 1.5% on the month, driven by gasoline (−7.5%) and fuel oil (−4.2%). Shelter, which represents more than one-third of CPI and remains the primary inflation driver, rose just 0.2%, a noticeably more moderate pace than recent prints bringing shelter inflation down to 3% year-over-year. Used vehicles declined 1.8%. Food rose 0.2%, a contained pace. In short, the components that matter most in household budgets, gas, rent and groceries are on a path toward normalization.
This report provides a welcome release valve after a bruising week for markets. As David Russell of TradeStation summarized: “This inflation report is a relief for investors rattled by AI-related disruptions. It also offsets this week’s strong jobs report, giving the Fed a bit more reason to lean toward easing. But inflation remains well above the central bank’s target and doesn’t change much in the near term.”
Markets, however, reacted with restraint. The three major U.S. indexes opened essentially flat, as the report was not surprising enough to trigger a meaningful rally after Thursday’s broad sell-off. The S&P 500, Nasdaq, and Dow are oscillating around unchanged, with all three tracking toward weekly declines. On the week, at the time of writing, the S&P 500 and Dow are down more than 1%, and the Nasdaq is heading for a drop of about 1.9%. Bloomberg notes that the S&P 500 is on pace for its worst week since November.
On the earnings front, Friday’s tape is a sharp contrast between winners and losers, a recurring theme this week. Applied Materials surged 13% after quarterly results beat expectations (adjusted EPS of $2.38 vs $2.20 expected, revenue of $7.01B) and strong guidance, validating robust AI-driven demand for chip-making equipment. Rivian Automotive jumped about 20% on better-than-expected results and 2026 delivery guidance of 62,000 to 67,000 vehicles, up 47% to 59% versus 2025. Airbnb gained 6% after Q1 revenue guidance came in above consensus, with Deutsche Bank upgrading the stock to buy and raising its target to $154. Roku rallied 15% after results and guidance came in above expectations.
On the downside, Pinterest sank about 24% the biggest decliner of the day after disappointing Q1 results and revenue guidance, reviving concerns that AI could erode its visual discovery platform. DraftKings fell 17% despite a quarterly beat, weighed down by 2026 revenue guidance of $6.5B to $6.9B, well below the $7.31B consensus.
Conclusion
Friday’s session is shaping up as a “pause and digest” market following Thursday’s shock. The CPI report provides a psychological floor inflation is trending down and rate cuts remain on the table but it is not spectacular enough to reverse the week’s negative tone. Bond markets reacted more constructively, with short-end yields lower. Bets on a June rate cut strengthened, with a majority of traders now pricing in a quarter-point reduction at that meeting.
The split between Applied Materials (+13%) and Pinterest (−24%) captures today’s market regime: companies with direct exposure to AI infrastructure (equipment, chips) are being rewarded, while businesses perceived as structurally vulnerable to AI disruption are being punished aggressively. This selective sorting “AI winners” versus “AI losers” has become the dominant lens through which the market is underwriting each earnings print.
As Barclays strategist Emmanuel Cau observed: “Investors are giving no quarter to anything perceived as an AI loser. The list keeps getting longer by the day, deepening the divergence between new/old economy sectors and between U.S. equities and the rest of the world.” The fact that Asian markets have outperformed U.S. indexes by more than 12% year-to-date illustrates this global repositioning: hardware producers with pricing power (Samsung, TSMC) are being preferred over software giants spending heavily on AI without immediate payback.
For the week as a whole, the scorecard is clear: even with a solid jobs report on Wednesday and cooling inflation on Friday, AI-disruption fears dominated the narrative, triggering heavy selling across software, logistics, commercial real estate, and financials. The S&P 500 is tracking toward its worst week since November, and next week’s key question is whether markets find an anchor level or whether the sector re-rating wave continues.
