Wall Street traders sent stocks lower after a series of all-time highs spurred calls for a breather amid signs of buyer exhaustion. Bonds rose as a US$58 billion Treasury sale drew solid demand.
The ebullience driven by artificial intelligence gave way to concerns about the rally being excessive after a US$16 trillion surge in the S&P 500 from its April lows. Tech giants dragged down the index amid a report that Oracle Corp’s cloud margins are lower than many estimate. Tesla Inc sank over 4% after introducing new versions of its top-selling models priced at under US$40,000.
Investor optimism has grown heated in recent months, with many investors seeming too busy chasing the upside to worry about risks like a US government shutdown and stretched valuations.
Goldman Sachs Group Inc’s trading desk said last week bullish sentiment among clients was the highest since December. A sentiment tracker compiled by Barclays plc has been near a level that indicates exuberance. A similar Bloomberg Intelligence measure went back to “manic” zone.
“A period of consolidation would not come as a surprise after such a strong recent run, but we believe the equity rally is underpinned by solid fundamentals that should continue to support the market,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.
The S&P 500 closed around 6,715. Oracle slid 2.5%. Dell Technologies Inc climbed 3.5% after hiking estimates amid strong AI demand. US 10-year yields dropped three basis points to 4.13%. The dollar rose.
Traders also parsed remarks from Federal Reserve (Fed) officials, with governor Stephen Miran saying his expectations for a limited tariff impact on inflation mean the Fed can keep easing policy. Fed Bank of Minneapolis president Neel Kashkari warned that any drastic rate cuts would risk stoking prices.
“Profit-taking risks have rapidly risen across markets, and are particularly elevated for Nasdaq, potentially hampering further upside,” said Citigroup’s Chris Montagu.
Craig Johnson at Piper Sandler says he remains optimistic, particularly with macro tailwinds lifting the stock market. However, he believes there are subtle signs of diverging momentum that warrant vigilance, especially with over-extended stocks that have risen substantially in recent weeks.
“A brief consolidation or shallow pullback would be welcomed to set up better risk-reward opportunities,” he noted.
At Fundstrat Global Advisors, Mark Newton says “overbought conditions” are notoriously a poor reason to avoid owning US equities, as many investors realise that can likely persist and don’t have to specifically represent a reason for concern. Yet “it’s important to pay attention and not become overly complacent.”
“Of course valuations are moving higher. They usually do, especially after swift sell-offs like the one we saw in April,” said Callie Cox at Ritholtz Wealth Management. “Now, we need to see earnings and economic data follow through.”
Cox says the price-earnings ratios pushing towards extremes should encourage investors to rebalance.
“There’s still a lot of hidden value, or sell-off protection, out there that could keep you cushioned against AI disappointment,” she noted.
Some Wall Street pros note that having multiple large technology stocks surge by double-digits in quick succession could be a sign that valuations have become disconnected from underlying fundamentals.
The moves come amid growing chatter about a bubble forming around AI as key players pledge billions of dollars in deals with a cohort of companies making infrastructure for the technology. As more money is spent, there’s mounting fear the trend will end in a crash the way it did 25 years ago following the dot-com euphoria.
Warnings that we are seeing a repeat of the dot-com bubble are heard regularly, noted Louis Navellier at Navellier & Associates. The big difference is that this time, the players are huge companies with huge balance sheets and existing cash flow, he said.
“If profitability takes longer than expected, a few of the hardware suppliers will suffer operating losses,” Navellier added. “Nevertheless, with the market so heavily weighted to companies that are all-in on the AI bet, any serious setbacks on the prospects of AI profitability will have a serious impact on market indexes in the short term.”
With that said, Navellier noted investors shouldn’t worry about a stock-market bubble, “since as long as the analyst community is raising earnings estimates and the Fed is cutting key interest rates, we can invest confidently in A-rated stocks.
Meantime, Jamie Dimon said JPMorgan Chase & Co spends US$2 billion a year on developing AI technology, and saves about the same amount annually from the investment.
“We know that it’s got to billions of cost savings and I think it’s the tip of the iceberg,” the bank’s chief executive officer, who has consistently touted the opportunities offered by AI, told Bloomberg TV.
“There has been plenty of chatter regarding the lofty valuations in the equity market and need for a rationalisation lower. At issue isn’t whether stocks have gotten a bit ahead of themselves, rather how the financial system would respond to a sharp correction,” said Ian Lyngen and Vail Hartman at BMO Capital Markets.
The BMO strategists noted that Tuesday’s price action was by no means a massive downtrade, instead it was a pullback in the tech sector following the concerns regarding narrow profit margins on AI-related cloud server rentals.
“We are by no means technology experts and will leave the process of evaluating the cloud server worries to those more qualified. Our only takeaway was that the Treasury market is comfortable in the prevailing range and wobbles in equities provided a handy excuse to rally,” they concluded.
Source: theedgemalaysia