Market professionals indicate that confidence is limited regarding whether U.S. stocks can sustain their recent $1 trillion rebound and continue to rise following last week's AI-driven sell-off.

A significant rally occurred in U.S. stocks last Friday, with the S&P 500 posting its best single-day performance since May, erasing most of the week's losses. However, investors continue to grapple with an uncertain economic outlook and growing concerns about how artificial intelligence will reshape various industries, particularly the software sector, which was at the epicenter of the recent market turbulence.

Signs of weak conviction behind Friday's rally were already apparent. An expected volatility indicator for the S&P 500 remains above its yearly average, reflecting persistent market unease. Trading volume also suggests a lack of enthusiasm, being approximately 13% lower than the five-day average. A Goldman Sachs Group basket of highly shorted stocks surged about 9% in a single day, its best performance since April, indicating that part of the rebound's momentum came from traders closing out short positions in high-risk stocks.

"Investing in AI has shifted from offering broad, universal benefits to a 'winner-takes-all' dynamic," said Sameer Samana, Global Head of Equity and Real Assets at Wells Fargo Investment Institute. "Unless the market can distinguish the true leaders from the laggards within the sector, it will be difficult to establish a new leading trend or push the index to new highs."

It is also noteworthy that last week's market decline was not solely due to the AI sector.

Weak U.S. labor market data sparked concerns about economic fundamentals, adding downward pressure on stocks, commodities, and cryptocurrencies. While a report released on Friday showing consumer confidence hitting a six-month high provided support for the day's sharp gains, this has heightened the market's focus on the delayed U.S. monthly jobs data, expected Wednesday, to assess the extent of emerging economic cracks.

AI Anxiety AI-related trading remains a significant underlying concern. Investors have been worried about whether major tech companies can translate their massive investments in the technology into profits. Now, following startup Anthropic's launch of new tools for legal work and financial research, they are also contending with the competitive threat AI poses to numerous business models.

Earnings reports from Microsoft, Alphabet (Google's parent), and Amazon—members of the "Magnificent Seven"—showed related expenditures exceeding market expectations, leading to significant stock price declines. After Amazon announced plans to invest $200 billion in data centers, chips, and other equipment this year, its stock fell nearly 6%, marking its largest single-day drop since last August.

These declines have squeezed some froth from the market. Data compiled by Bloomberg shows the S&P 500's forward 12-month price-to-earnings ratio is now around 22, near its lowest level since April 2018, when comprehensive import tariffs from the Trump administration disrupted markets. However, this has not yet proven attractive to Wall Street professionals.

Goldman Sachs' trading desk stated in a client note on Friday that its positioning indicators suggest there is still room for further market swings. The firm's models indicate that Commodity Trading Advisors (CTAs) are poised to continue selling this week, regardless of market direction. The bank's prime brokerage team reported that nominal short selling in U.S. single stocks last week reached its highest level since records began in 2016.

At 7:38 AM New York time, S&P 500 index futures were down 0.2%.

Adam Turnquist of LPL Financial is closely watching whether the S&P 500 can hold above its low from last December. The firm's Chief Technical Strategist stated that the performance at this key level will determine the market's subsequent trajectory into 2026.

Turnquist's research shows that since 1950, when the S&P 500 has held above its December low during the first quarter, the index has delivered an average annual return of 19.5% for that year. Conversely, when the benchmark has broken below that key level, the average annual return has dropped to just 0.6%.

When the S&P 500 hit a recent low this month, its closing level remained about 1% above the December 2023 closing low.

A notable feature of the recent sharp swings in U.S. stocks has been a rotation of funds out of the technology sector and into market areas more closely tied to economic growth, such as energy and materials. However, weak employment data has broadened market concerns beyond just the AI sector.

"The current market volatility is also making investors cautious," said Keith Lerner, Chief Investment Officer at Principal Financial Services. "They have become more wary compared to before, choosing to hold cash and wait for a better entry point."