The S&P 500 has fallen more than 1.7% since last Friday’s close, led by big declines in the so-called Magnificent 7 tech giants amid a mix of concerns tied to artificial-intelligence spending, equity valuations, and some high profile bets against the sector at large.
Even stocks that managed to top analysts’ forecasts with quarterly earnings this week, such as Palantir Technologies, Qualcomm, and Advanced Micro Devices, have been caught in the downturn. An index of the Magnificent 7, meanwhile, has fallen around 4% from its peak early Monday.
“Market participants aren’t used to seeing companies with such close involvement in (the AI trade) selling off like this,” said David Morrison, senior market analyst at Trade Nation.
“It’s one thing for equity markets to suffer a general pullback. But it’s quite another to see stocks at the vanguard of AI development getting trashed,” he added.
But investors don’t appear to be losing faith in the AI rally, at least according to data from Bank of America’s closely tracked “Flow Show” report.
Around $36.5 billion has plowed into tech stocks and related funds over the past two months, the highest tally on record. Broader equity portfolios, meanwhile, attracted $19.6 billion in new money over the past week, extending the longest run of gains since December 2024.
This week’s selloff may have also taken some froth off the top of a market that has risen nearly 35% from its early April lows and set 36 separate record highs since the start of the year.
Data from Bespoke Investment Group showed the 10-day trendline tracking advancing stocks against those in decline on the S&P 500 has moved to an “oversold” condition for the first time since the April tariff slump.
That presents “buying opportunities for investors who have missed out on the market’s strength over the past two months,” said Glen Smith, chief investment officer at GDS Wealth Management in Flower Mound, Texas.
Smith expects stocks to “grind higher, albeit slowly, between now and the end of the year.”
Markets on Friday would normally relying on a monthly jobs report to stoke investor sentiment, particularly now that various private sector readings of the labor market have been showing weakness through the month of October.
But the ongoing federal government shutdown, now the longest on record, has left markets bereft of official data releases.
Challenger Gray’s benchmark reading of corporate layoffs, however, is on pace to deliver the highest overall tally of jobs cuts since 2009 by the end of the year. Layoffs in October surged nearly three-fold on the month to 153,000.
And even with the broader economy continuing to perform, labor market weakness likely will compel the Federal Reserve to lower interest rates when it meets for its final policy decision of the year next month in Washington.
“The economy remains on an upward trajectory, but the key focus of the Fed’s debate will be the health of the labor market,” said Seema Shah, chief global strategist at Principal Asset Management, who predicts a December rate cut.
“Much of the market’s optimism hinges on the assumption that policymakers will maintain some level of support,” she added.
The CME Group’s FedWatch pegs the odds of a quarter-point reduction in rates at around 69%, up from around 63% earlier this week.
Stocks are still likely to slide into the close Friday, and with volatility gauges on the rise further declines into next week also are likely.
But many investors still see the market’s bull thesis holding into the end of the year and beyond.
“Aside from the reality that pullbacks are inevitable even during the strongest trends, the longer term AI story is intact,” said Daniel Skelly, head of Morgan Stanley’s Wealth Management market research and strategy team.
Write to Martin Baccardax at martin.baccardax@barrons.com
