Stocks closed sharply higher on Friday, led by the small-cap Russell 2000 with an outsized gain of 3.60%. The mid-cap S&P 400 and the Dow weren't far behind with 3.07% and 2.47% respectively. And they each made new all-time highs in the process.

Even the tech-heavy Nasdaq and S&P 500, which struggled earlier in the week on AI spending concerns, surged roughly 2% each.

But as I mentioned last week, I viewed the recent volatility as simple profit taking after heady gains over the last several months.

And the idea that the AI boom is over, and that companies investing heavily in AI will never see a return, couldn't be further from the truth, in my opinion.

We are still in the relatively early stages of the transformational AI boom. And I believe it has years more to go. To be sure, it will enter different phases along the way. Companies like NVIDIA, for example, are selling the AI infrastructure (chips, servers, AI training systems). Others have to buy these products to build their AI models and tools. Then those tools are sold to others to build their products, or used internally to build their own products.

We are in the infrastructure phase right now and it's accelerating. The tools and models phase are in the early innings. And the application and productivity phase has really just begun. That's where the real broader economic payoff happens. But the winners will multiply as the cycle moves thru its stages.

Another myth floating around is that AI will kill the software industry.

What?

Remember the phrase "software will eat the world"? Now some people think AI will eat software. And they are likely right. But that's not the death of software. It's an enhancement of software. And the modern extension of that phrase is really "AI will eat software, and software will eat the world."

The original phrase meant that software will be the dominant layer of value creation in every industry.

And it has become that.

AI, however, will soon become the dominant layer of value creation. But not to the demise of software. But to its betterment. Because AI is the next layer on top of software, or becomes the intelligence inside the software, which then accelerates software's dominance across every industry. Simply put, AI doesn't eliminate software, it runs on it and increases demand for it.

NVIDIA CEO Jensen Huang said, "there's this notion that the tool in the software industry is in decline, and will be replaced by AI...it is the most illogical thing in the world, and time will prove itself."

In other news, Friday's Consumer Sentiment report rose to 57.3 vs. last month's 56.4 and views for 55.5. The year-ahead inflation expectations, which is part of that report, eased to 3.5% from last month's 4.0%.

What we didn't get on Friday was the originally scheduled Employment Situation Report from the Bureau of Labor Statistics (BLS). That was delayed due to the several-day government shutdown. But with the shutdown being so short, so is the delay. And we'll get that report on Wednesday, 2/11.

Earnings season continues this week with another 832 companies set to report.

While the market was mixed for the week, the Russell 2000, Dow, and S&P 400 were up for the week.

But all of the indexes, whether up or down for the week, ended on a strong note.

And we'll see if they can build on that momentum this week.

See you tomorrow,