The Dark Side of AI: Wall Street Weighs the Recent Stock Market Sell-Off and Its Disruptive Impact

The stock market has just witnessed how disruptive investor concerns about artificial intelligence can be across multiple industries.

Last week, the volatility in software stocks spread to wealth management, transportation, and logistics, raising questions about how much AI can truly transform the tech sector and high-fee service industries.

Driven by AI concerns, the financial services sector (XLF), consumer discretionary (XLY), and tech stocks were sold off, with both the S&P 500 (^GSPC) and the Nasdaq Composite (^IXIC) falling more than 1% this week. The Dow Jones Industrial Average (^DJI) fell 1.2% this week, the Nasdaq Composite (^IXIC) fell 2%, and the S&P 500 (^GSPC) fell 1.4%.

This is the dark side of AI, Tim Urbanowicz, chief investment strategist at Innovator Capital Management, told Yahoo Finance. We need to pay attention to this because I think other industries will be disrupted as well, and it's definitely a threat.

Shares of CH Robinson (CHRW) and Universal Logistics (ULH) fell 11% and 9% this week, respectively, after a Florida-based company announced a new tool that could expand freight capacity without adding staff.

The sell-off echoed declines in wealth management stocks like Charles Schwab (ticker: SCHW) and Raymond James (RJF), whose shares fell 10% and 8% this week, respectively. This followed the launch of an AI-powered tax tool by these firms that allows advisors to customize tax strategies for clients. The tool sparked concerns that automation could put pressure on the industry's hefty advisory fees.

The "AI panic trade" has now spread to multiple sectors, with software stocks taking a beating in recent weeks on fears that AI will take over tasks traditionally handled by corporate giants like Salesforce (CRM) and ServiceNow (NOW) and disrupt their revenue models.

The Technology Software Industry ETF (IGV), which also includes heavyweights like Microsoft (MSFT) and Palantir (PLTR), is down 22% year to date.

Many on Wall Street believe the sell-off is overdone.

I don't think the bottom is in, Urbanowicz said. The margins on these stocks are very high. Margins haven't come down, and valuations are still high.

Nonetheless, Urbanowicz still sees a very favorable backdrop for stocks and predicts the S&P 500 will reach 7,600 by year-end.

This is partly due to the favorable regulatory environment provided by the Trump administration, corporate tax incentives from the Great Good Act, and leadership in other sectors like energy (XLE), consumer staples (XLP), and materials (XLB), all of which have posted double-digit percentage gains year to date, while tech (XLK) is down 2.5% over the same period.

Amanda Agati, chief investment officer of PNC Asset Management Group, advises ignoring the volatility and focusing on broader themes.

I think this is just short-term volatility, and we're seeing a pretty clear uptrend in the overall market outside of these individual stocks... That really makes me believe that even with a more volatile market this year, this rally is sustainable, Agati told Yahoo Finance.

UBS strategists recently said investors should look beyond tech to hedge potential risks and fully capture the growth potential AI could bring to all industries.

We also believe that companies that actively use AI to enhance operations and develop business models should benefit, especially those in the financial and healthcare sectors, said Ulrich Hoffmann-Burchardi, chief investment officer for the Americas at UBS Global Wealth Management and global head of equities, in a recent report.