The Week Ahead - Fed Minutes, PCE Friday, and AI Selloff Shape Volatile Week

Markets are closed on Monday for Presidents’ Day. Enjoy the breather. You'll need it.

Tuesday brings the New York Fed Manufacturing Survey. Wednesday delivers the FOMC Minutes, the Fed's internal debate transcripts from January's hold at 3.50–3.75%.

Powell made it clear: inflation is above target, patience is the play, and nobody's rushing to cut. Governors Miran and Waller dissented. They wanted another quarter-point cut. The committee ignored them.

Futures markets are pricing roughly two quarter-point cuts by year-end. Any hawkish language in Wednesday's minutes, any hint that the internal debate is shifting toward hikes, and that consensus evaporates. Fast.

Thursday delivers Q4 GDP, Initial Jobless Claims, and the Philadelphia Fed Manufacturing Survey.

Friday is the main event. Core PCE inflation, the Fed's preferred gauge, is released alongside the Services and Manufacturing PMIs and New Home Sales.

Goldman Sachs revised its core PCE forecast upward to 3.05% year-over-year for January. That's well above the Fed's 2% target. It's higher than November's 2.8% core reading. Goldman's headline PCE estimate is 2.81%. The divergence between CPI and PCE this month? Consumer electronics and IT commodity prices carry more weight in PCE.

Translation: the inflation gauge the Fed actually watches may be running hotter than the one the media covers.

If core PCE prints above consensus, rate-cut expectations for H1 2026 die on the table. The Cleveland Fed's nowcast projects February PCE at 2.46% year-over-year. Any upside surprise amplifies an already volatile environment.

Then there's the Supreme Court. The Justices next take the bench on February 20. A ruling on Trump's use of the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs could land that day or later. The case is a constitutional showdown over trade policy.

Both outcomes produce turbulence. One just produces different turbulence.

Earnings season delivers a stress test for bellwether names this week. Retail, industrials, semiconductors, and cybersecurity are all on the table.

Palo Alto Networks (PANW) reports Tuesday after close. Wall Street expects $0.94 EPS on $2.58 billion in revenue, 16% EPS growth, and 14.15% revenue growth year-over-year. Last quarter, PANW beat on all metrics. Next-Gen Security ARR surged 29% to $5.9 billion.

Here's the thing: the company just closed a $25 billion CyberArk acquisition on February 11. Two weeks after completing a $3.35 billion Chronosphere deal. Two mega-acquisitions in two months. Integration risk is real. Options pricing suggests traders expect up to an 8% move in either direction.

Stifel cut its target to $200. JPMorgan trimmed to $225. The cybersecurity leader needs a clean slate and forward guidance that justifies the buying spree. Anything less, and the options market does the talking.

Walmart (WMT) reports on Wednesday before open, alongside ADI and Deere, making it a triple stress test before the bell. Expectations center on resilient consumer spending. Guidance could reveal whether middle-income consumers are weathering elevated inflation or showing cracks.

Analog Devices (ADI) reports on Wednesday before opening. Consensus sits at $2.31 EPS on $3.10 billion in revenue, roughly 38% EPS growth and 26% revenue growth year-over-year. The stock has surged to all-time highs near $325. It's trading at a 71x P/E ratio. Just as AI infrastructure spending faces heightened scrutiny.

ADI also announced price increases of 10–30% across its product portfolio, effective February 1. If guidance disappoints or signals any demand softness, expect heightened selling in an already nervous semiconductor space.

Sound familiar? Premium valuation meets reality. Every time.

Deere (DE) reports on Wednesday before open. Consensus is approximately $1.92 EPS, a roughly 40% decline year-over-year on revenues of $7.5 billion. Quarterly revenue is actually expected to rise about 11% as small ag and construction segments grow. But the bottom line is getting crushed by tariff impacts and cyclical weakness in large ag.

Management guided full-year net income between $4.0 billion and $4.75 billion for fiscal 2026. Any further downward revisions signal deeper stress in the farm economy.

Former Google CEO Eric Schmidt's warning that "we're running out of electricity" adds context. The U.S. needs roughly 92 gigawatts of new power, compared with just 1.5 GW per nuclear plant. That math has implications for Oklo, GE Vernova, NuScale Power, and Eos Energy Storage.

Power demand is becoming a structural constraint on AI expansion. The bottleneck shifts. First, it was chips. Now it's kilowatts.

The dominant narrative: AI capital spending may not produce returns that justify the burn rate.

U.S. stocks fell sharply on Thursday (Feb 12). The S&P 500 dropped 1.6% to 6,832.76. The Nasdaq fell hard. Concerns over AI spending hit a tipping point. The VIX surged 17.96% to 20.82, its highest level since mid-2025's tariff jitters.

The catalyst? Cisco plummeted 12.3% after weak full-year guidance. Sparked a broader tech rout. The fear gauge broke the psychologically critical 20-level.

Translation: institutions were paying up for downside protection.

Microsoft, Amazon, Meta, and Alphabet are expected to spend over $600 billion on capex in 2026. Amazon alone indicated its capex could hit $200 billion, surpassing analyst forecasts by over $50 billion. Alphabet projected $175–185 billion in revenue.

That's a lot of depreciating assets and consumed free cash flow. With returns still largely theoretical.

UBS strategists warned that AI disruption risk could knock down bond prices and increase defaults in junk-bond markets. D.A. Davidson downgraded Amazon from buy to neutral. Software stocks are getting punished the hardest. Investors aren't just asking who benefits from AI. They're hunting for who gets replaced.

Here's the kicker: this AI anxiety is occurring alongside a broader market rotation. Small-cap and value stocks dramatically outperformed mega-cap growth in January. The valuation gap between small and large caps had reached a 25-year extreme before the rotation began.

The Fed's easing cycle brought rates to 3.50–3.75%. That provided relief for smaller companies carrying floating-rate debt. Small caps jumped over 3% in 2026 while the S&P 500 flirted with negative territory.

The dollar tells the same story from a different angle. The DXY has declined sharply from late-2025 highs, dropping back into the 96–97 support zone. The dollar is weakening while equities remain near record highs and gold breaks into price discovery, suggesting capital is flowing into risk assets and real assets, not seeking safety in dollar-denominated instruments.

Gold futures jumped 1.4% Friday after the softer-than-expected CPI print.

Credit markets are flashing caution. Spreads are widening. Institutional investors are scrutinizing the returns on capital-intensive AI projects. Schwab's sector ratings now favor Communication Services, Industrials, and Health Care while downgrading Consumer Discretionary, Real Estate, and Utilities.

Think about that. The market isn't collapsing. It's rotating. And rotations hurt more when you're sitting in the wrong seat.

Retail traders set records in January. Net stock inflows exceeded $350 million. Options inflows surpassed $300 million. Both record highs for the month, according to Citadel's Scott Rubner.

Retail consistently bought cash equities and leaned toward purchasing options each week. Buying intraday dips with conviction.

Here's the thing: historical patterns suggest retail cash trading typically decreases from January to February. Seasonal trends since 2017 show a consistent drop in net notional following January's initial surge. Bespoke Investment Group data shows that the S&P 500 has averaged gains of over 1% in January since 1928. February? Typically minor declines.

Spoiler: January enthusiasm often meets February reality.

The VIX established a new "spike peak" buy signal after reaching 23.10 on February 5th. Then it slid to 18. Then it surged back to 20.82 on Thursday as tech selling intensified. The VIX term structure remains constructive for stocks.

But a close above 23.10 would stop out the signal and potentially trigger more defensive positioning.

Polymarket activity has been relatively quiet on financial markets. More volume is concentrated on climate outcomes and commodity price predictions. Silver prediction markets show 87% odds of staying above $70 by month-end and 53% odds of exceeding $75.

The relatively muted financial market activity on Polymarket suggests retail speculators are more engaged in traditional equity and options markets than prediction platforms this cycle. Old habits. Hard to break.

Multiple catalysts could produce outsized reactions this week. Let's review the scenarios.

PCE Surprise to the Upside. If Core PCE on Friday prints meaningfully above Goldman's 3.05% forecast, it reinforces the Fed's hawkish tilt. Forces traders to reprice rate cut expectations. Risk-off cascade into the weekend. Conversely, a soft print provides temporary relief to tech under pressure and fuels the small-cap rotation.

Hawkish FOMC Minutes. If Wednesday's minutes reveal internal dissent about inflation persistence or signal openness to rate hikes rather than cuts, it contradicts the roughly two cuts markets are pricing by year-end. Macquarie strategists have even suggested a 2026 hike as the "biggest surprise" scenario.

Markets are not prepared for that.

Earnings Disappointment. If any major report, such as PANW, ADI, Walmart, or Deere, delivers guidance that reinforces demand softness, it amplifies the sector-specific selling already underway. PANW options pricing implies an 8% move in either direction. ADI sits at an all-time high with a 71x P/E. The stakes are elevated.

Supreme Court Tariff Ruling. If the Court rules against Trump's IEEPA authority, it forces a wholesale recalibration of trade policy. If upheld, the administration's tariff regime is validated, and trade friction could accelerate. Both outcomes move markets. Neither offers clarity.

Dollar Breakdown. If the DXY decisively breaks below 96–97 on a weekly close, it confirms a trend shift. Opens downside risk toward 94–95. That accelerates capital rotation into gold, commodities, and international assets.

A hold at current levels stabilizes risk sentiment. Maybe.

Technology dropped to a 16% discount to fair value, down from 11% last month, as the selloff compressed valuations amid rising uncertainty about AI infrastructure ROI. Software stocks face the most acute pressure.

Investors aren't just worried about who benefits from AI. They're hunting for who gets displaced by it.

Financial services dropped to a 2% premium from 8% as credit concerns mounted. Widening spreads highlight institutional unease about lending to capital-intensive firms with uncertain AI payoffs. When the Fed's independence is openly questioned, and the neutral rate may be higher than previously believed, the cost of capital for large-scale projects becomes the critical variable.

Consumer Defensive and Basic Materials moved further into overvalued territory, with 17% and 10% premiums, respectively, as investors seek safety and real assets amid tech volatility. Classic defensive rotation.

Communication Services, Industrials, and Health Care are rated Outperform by Schwab. Solid fundamentals. Exposure to secular trends. Better earnings visibility. Less sensitivity to sudden spikes in capital costs.

Compare that to Consumer Discretionary, Real Estate, and Utilities. Downgraded. Exposed. Expensive.

This week is a collision of macro catalysts, earnings stress tests, and unresolved questions about the sustainability of AI capex. Everything that fueled the rally for two years is now getting stress-tested simultaneously.

Wednesday's FOMC Minutes could reveal the Fed's internal debate is more hawkish than markets expect. Friday's Core PCE data, Goldman's forecast of 3.05%, could force a rate-cut repricing. The Supreme Court's tariff ruling adds geopolitical uncertainty to an already complex setup.

Earnings from PANW (Tuesday after close), ADI (Wednesday before open), Walmart, and Deere (Wednesday before open) test whether corporate fundamentals can support elevated valuations. The semiconductor and cybersecurity names face particularly high stakes after recent stock strength. Options markets are pricing significant post-earnings moves.

The broader market continues shifting from mega-cap growth toward value and small-cap rotation. But this rotation is occurring alongside credit stress. Spreads widening. Strategists are warning of AI-related disruption risks bleeding into junk bonds. The VIX at 20.82 says volatility expectations are rising. Retail traders who set records in January are now facing seasonal headwinds.

The dollar is testing critical support at 96–97 DXY, while gold is breaking into price discovery. A dollar breakdown confirms a trend shift and accelerates rotation into real assets. A hold at current levels could stabilize sentiment. Could.

For traders: focus on conditional scenarios, not directional predictions.

Position for quality, earnings visibility, and sectors with less sensitivity to capital cost spikes. Maintain flexibility. The setup favors nimble traders over static bets.

This is a week where surprises produce outsized moves. Plan accordingly.