How Much Has the Bull’s Case Deteriorated?
The S&P 500 has pulled back from recent highs over the past few weeks on slippage of AI Enthusiasm and some erosion of the certainty of further Fed rate cuts, and that has combined to push the S&P 500 4.6% lower from recent highs. Additionally, the tenor of market headlines has soured, with headlines about AI bubbles and a divided Fed populating major market publications. Should we be worried?
Amidst this change in market tone/sentiment, the more important question for mid- and long-term investors is: “How much has the bullish case deteriorated?”
My answer is: “Not that much.”
Starting with AI Enthusiasm, clearly, concerns about the enormous pace of cap-ex have rightly risen to the surface, but at this point, that mostly threatens to take some of the recent “froth” off the market. I think few will argue that AI isn’t a transformational technology, and yes, spending intentions and excitement about margin expansion have likely gotten ahead of themselves. But we are not at the stage yet where AI cap-ex intentions are dramatically being dialed back, and until that happens, the reality is this is a significant pro-growth economic force.
If cap-ex intentions begin to reverse (which can’t be ignored but isn’t happening at this point), then the outlook will become demonstrably more negative, but that is not happening now.
Turning to the Fed, yes, they are divided, and the inevitability of further rate cuts has been shattered. It’s likely, at this point, the Fed cuts in December and signals a potential pause or doesn’t cut in December but cuts in January. Either way, it’s worse than what was expected. So, this is a modest negative. But as long as economic growth stays stable, then the Fed not cutting rates is not a bearish game-changer for this market.
Finally, turning to growth and tariffs, despite concerns about the economy, the reality is that growth is holding up “fine,” and it’s not just the macro data that’s showing that, it’s corporate commentary, too. So, while there are risks to the economy, the reality is that actual growth metrics (both macro and micro) are stable.
Finally, on tariffs, the likely reversal of IEEPA tariffs is a potential unknown for the markets, but barring some draconian policy (like the actual implementation of the original reciprocal tariffs), corporate America and the U.S. economy appear to have the capacity to weather it.
Do not take this analysis as my effort to downplay potential market risks. If AI cap-ex reverses, the Fed announces a pause, growth starts to roll over, and tariff chaos causes corporate and macroeconomic uncertainty, the outlook for this market will change substantially, the market will fall hard, and we’ll have to talk about the end of the bull market.
But for now, that isn’t happening, nor does it look close. In fact, looking back at earnings reports for the third quarter, GDP, and job growth, this economy is humming. Never a bad idea to look for potential negatives, but the strength of the economy keeps our momentum for the near term quite positive.
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