S&P 500 Heads for Longest Slump Since August

Omar Aguilar, CEO and CIO at Schwab Asset Management gives his market outlook as the S&P 500 moves toward a fourth day of declines.

US stocks sank, putting the S&P 500 Index on track for its longest slide since August, as a six-month rally shows signs of cracking following a $1.2 trillion selloff in cryptocurrencies and amid fears around stretched artificial-intelligence valuations.

The benchmark equities gauge dropped for a fourth day, declining 1.2% as of 10:08 a.m. on Tuesday in New York, as investors reconsidered their optimistic expectations for Federal Reserve interest-rate cuts. The technology-heavy Nasdaq 100 Index fell 1.5%. A basket of the Magnificent Seven companies declined 2.2%. Nvidia Corp., at the center of the AI frenzy, slumped an additional 3% ahead of its earnings report on Wednesday. Amazon.com Inc. and Microsoft Corp. fell more than 2% after a ratings downgrade.

Wall Street’s so-called fear gauge, the Cboe Volatility Index, topped 25 — above the key 20 level that causes concern for traders — and reached its highest in a month. Traders dumped the riskiest parts of the stock market. A Goldman Sachs Group Inc. basket of unprofitable tech companies, which includes firms such as Roku Inc. and Peloton Interactive Inc., dropped almost 2%.

Stock indexes fell globally. Topping the list of worries are AI valuations and whether the Fed will cut rates next month. Traders have diminished conviction about another reduction in borrowing costs, with swaps now implying a less-than-50% likelihood of a December rate cut. Several policymakers have recently cautioned against a cut, although Fed Governor Christopher Waller repeated his view in favor of lowering rates.

“Appetite for AI is under pressure from circularity worries and bubble fears,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. “The bad news is that some of the more bullish vibes — AI enthusiasm, massive government stimulus, dovish central-bank expectations — are starting to fade.”

Among other individual stocks, Home Depot Inc. dropped 2.8% after cutting its full-year earnings guidance, warning that some unsteady consumers are hitting the pause button on big-ticket home purchases. Target and Lowe’s will post results Wednesday, followed by Walmart and Gap on Thursday.

Bitcoin briefly dropped below $90,000 for the first time in seven months — and traders are betting on more downside. Meanwhile, a Bank of America Corp. survey showed that fund managers’ cash holdings have fallen to levels that have triggered a sell signal in the past.

The Philadelphia Stock Exchange Semiconductor Index dropped 2.7%. Most chipmakers retreated, with Micron Technology Inc., Intel Corp. and Qualcomm Inc. all falling between 2% and 5%.

The chorus of warnings about a possible AI bubble grew on Tuesday after JPMorgan Chase & Co. Vice Chairman Daniel Pinto warned that valuations in the industry could be due for a correction. “That correction will also create a correction in the rest of the segment, the S&P and in the industry,” Pinto said at the Bloomberg Africa Business Summit in Johannesburg.

US stocks have come under pressure this month as investors worried the AI-led rally has run too hot. The S&P 500 is trading at about 22 times forward earnings, above its 10-year average of 19. Concerns are also rising about the economic impact of the longest US government shutdown.

Dip Buyers

Investors have so far been keen to buy market dips given expectations for the Fed to cut and support the economy. Investors will get a long-delayed bit of economic data on Thursday when the US jobs report for September is released, more than a month late because of the government shutdown. It’s part of a data deluge that will guide expectations for how quickly the Fed will ease policy.

Some data is starting to trickle in. Initial jobless claims totaled 232,000 in week ended Oct. 18, according to the US Labor Department website showing historical data for claims. Meanwhile, US companies shed 2,500 jobs per week on average in the four weeks ended Nov. 1, according to data released Tuesday by ADP Research.

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