Just when you think that the worst might be over, the market looks to be deciding to throw another tantrum. After yesterday’s impressive comeback, tech stocks are once again starting to give investors another headache today.
S&P 500 futures are down 0.3% while Nasdaq futures are falling by 1.3%, as the optimism following the US midterm elections starts to wear thin again. So, are we going to see another déjà vu moment?
I wouldn’t be quick to rule that out. After all, yesterday’s early beatdown eventually gave way to a remarkable turnaround with the Nasdaq closing 1.4% higher. That being said, the only problem is that the underlying concerns surrounding the AI trade haven’t really gone anywhere.
The Democratic sweep has raised prospects of tougher scrutiny on AI infrastructure and data centre expansion. So, that is also putting investors in a bit of an awkward position.
On the one hand, slower spending could ease concerns about excessive capex among big tech and the mounting credit risks behind the AI boom. But on the other hand, it also threatens the ambitious growth projections that have helped justify lofty tech valuations.
Talk about being caught between a rock and a hard place, eh?
And let’s not forget about the bond market here. The flight towards Treasuries in recent weeks hasn’t necessarily been a vote of confidence in the economy. I would argue that part of that demand reflects investors getting nervous about debt financing in the AI sector, where widening credit spreads are making borrowing more expensive even as Treasury yields fall.
Putting all of that together, it’s hardly the kind of reassuring backdrop that tech investors would like.
To make things even more complicated, there’s also a rather intriguing flip side to this whole situation. If markets eventually embrace more disciplined AI spending, stocks could find some relief. However, improving risk appetite could also unwind the rally in the bond market and risk sending yields higher again.
With how messy the market flows can be, as seen with how things are playing out above, who’s to say we won’t get another dramatic turnaround later today? However, it is best to be reminded of the fact that there is a difference between dip buyers coming in to rescue the market and investors genuinely regaining confidence in the AI trade.
For now, I think we’re seeing something of an in between. And that’s keeping markets guessing still this week, although traders and investors will have little choice but to sort their feet out soon enough especially with the US jobs report coming up tomorrow.
This article was written by Justin Low at investinglive.com.