Last Week’s Takeaway: AI Enthusiasm Could Soon Be the Only Thing Holding Up This Market
Stocks dropped last week as investors were reminded that trade is still a potential source of volatility. But while the U.S./China trade escalation is notable, the biggest takeaway from the price action last week is clear: This market is becoming more and more reliant on AI Enthusiasm to maintain gains and move higher.
The U.S./China trade escalation headlines are a reminder that trade still remains very unsettled, and even though markets have ignored it for months, it’s still a potential problem for growth. Regarding the U.S./China escalation, the fact that President Trump announced Nov. 1 as the date for additional 100% tariffs means that, in all likelihood, negotiations will result in de-escalation and the uneasy truce between the U.S. and China will continue. But Friday’s headline is a stern reminder that the U.S. economy is still dealing with massive tariff uncertainty (which will only likely get worse after the Supreme Court decision), while tariff impacts on prices continue to move through the economy. Point being, this is not the type of environment conducive to 20-plus new highs in a year for the S&P 500.
Turning to growth, the labor market is cooling and the government shutdown will be at least a temporary head wind on growth. So far, markets have ignored these numbers and the shutdown, but it’s entirely possible that once data resumes, it’s weaker than expected. At that point, the benefit of more Fed rate cuts may be reduced for stocks, as the Fed could be viewed as “chasing” a slowing economy. Point being, that’s not the type of environment normally conducive to 20-plus new highs in a year for the S&P 500.
The reason the S&P 500 has hit so many new highs is AI Enthusiasm. And while that’s been true throughout the year, it’s especially true over the past six weeks. In fact, AI Enthusiasm is now focused, mostly, on one company’s tectonic spending plans: OpenAI. Over the past month plus, agreements between OpenAI and 1) Nvidia, 2) ORCL and 3) AMD have propelled the tech sector and S&P 500 higher. That’s turbo-charged already lofty expectations for AI-related cap-ex that has boosted this entire market.
Here’s the point: The market environment is not as good as the regular new highs in the S&P 500 implies, and AI Enthusiasm and the AI cap-ex cycle is becoming a larger and larger reason the market can ignore tariff chaos, cooling labor markets and the governments shutdown. As long as the AI cap-ex enthusiasm lasts, stocks can hold on. But AI is becoming a larger and larger lynchpin holding up the markets and if doubts emerge about the stimulative power of AI for the entire economy and market, then investors will have to face this less-than ideal reality and the declines could be sharp and painful. I’m not saying that’s going to happen, but I do want us to be aware of that reality, so we understand this market setup (and change any exposure appropriately, depending on risk tolerance).
If all of this makes you nervous, I could change your portfolio so that we incorporate bonds into the mix. I still think the markets will do well finishing the year, but if you would rather just be more conservative through all of this, please contact the office. There is always a risk you will miss some of the upturn of the market, but you need to be comfortable going forward, so please contact me if you choose to go more conservative.
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Source: Seven's Report 10-13-25