Last week's AI selloff isn't a major warning sign for markets, Barclays says

By Jules Rimmer

Last week's shift from merely bearish to 'deeply pessimistic' was overdone, according to Barclays team

It's too early in era of artificial intelligence to pick winners and losers, according to Barclays.

Last week's meltdown in risk assets doesn't represent an inflection point for the stock market overall - or for the artificial-intelligence sector that led it down - and investors should be more positive, says Ajay Rajadhyaksha, head of rates and securitized products research at Barclays. Rajadhyaksha has been neutral on risk assets for the last three weeks but now detects grounds for a more constructive approach.

For Rajadhyaksha and his colleagues Harry Mateer and Dominique Toublan, last week's shift from merely bearish to "deeply pessimistic" - as Anthropic's release of new plug-ins for its AI assistant Claude prompted a major leg down in software as a sector - was overdone. They noted that the correction was compounded by the capital-expenditure proposals of Amazon (AMZN) and Google (GOOG), the alarming decline in bitcoin (BTCUSD) and the volatility witnessed in precious metals (GC00) (SI00).

For Barclays, it is much too early to make a call on whether AI will make massive inroads on SaaS. In a special credit and macroeconomic report on Monday, the team argued that "it takes a long time for corporates to rip up existing systems" and that SaaS incumbents IGV have a "sticky" advantage in areas such as corporate-governance procedures and compliance protocols. This will make it challenging for AI to "commoditize SaaS companies," they said.

Even if the developments have a modest incremental impact on, for example, small and medium-size businesses' plans to reduce licenses and disrupt seat-based revenue models, it's probably too early to ascertain the longer-term trends, according to Barclays: "We don't know which theory will win out and it's not clear that anyone does right now," the analysts said.

There are three legs to Barclay's argument that the SaaS weakness is exaggerated. First, the team does not regard this as a major issue for debt markets overall, because, at 2.8% of the high-yield sector and 3.1% of the investment-grade space, the software debt is just too small to have a major impact.

Second, Barclays' equity analysts think the selloff has been indiscriminate. Some of these businesses benefit from data built up over decades that cannot be "vibe-coded" (an AI-assisted software-development approach), they noted, as well as from conservative customers who are not likely to change their procurement procedures or their current software packages.

Third, the market is inconsistent when it comes to assessing the impact of AI. Last summer the market was worried about AI adoption being too slow, the team pointed out, while now the markets are fixated on whether AI adoption will be too fast.

Moreover, the Barclays report stresses that both Google and Amazon went to great lengths to justify their capex and denied it was "speculative investment." Both companies said the pickup in capex was owing to overwhelming demand.

The final argument for Barclays turning more positive is the macroeconomic environment, which the team regards as supportive. The U.S. economy managed to grow at a rate of 2.5% in 2025, despite many obstacles, and it will be boosted this spring by the Republican legislation known as the One Big Beautiful Bill Act, which was passed in July. Tax refunds and tax cuts are set to arrive, while a weaker dollar has the effect of easing financial conditions. It's hard to be bearish on a market, according to the note, when the economy is seeing such healthy growth despite repeated setbacks.

The equal-weighted S&P 500 RSP set a record high last week. For Rajadhyashka, this is proof that investors agree with his view.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

02-09-26 1044ET