AI Stumbles, But the Broader Market Perseveres

Dear subscriber,

Last Friday, I warned you that artificial intelligence ("AI") risked a reversal in sentiment.

That reversal started the very next trading day.

Chipmakers like Nvidia (NVDA), Broadcom (AVGO), and Intel (INTC) all took dips greater than 3%. Meanwhile, AI darling Palantir Technologies (PLTR) fell as much as 12%.

With some investors starting to panic, I want to check in on what has happened with AI...

Because while it's true that these stocks are responsible for much of the broader market's gains these days, there's one important signal that shows the market still has some bullish life to it.

During the first half of this week, AI and other tech stocks began retreating from their highs.

As you can see, the tech-heavy Nasdaq 100 Index fell about 2.5% by midweek...

The narrative that AI progress has slowed is spreading.

Even Sam Altman, CEO of OpenAI, admits that he thinks investors have gotten "overexcited" about AI.

But look... one week doesn't make for a broad crash. Markets are noisy. They're volatile, especially as of late. And one week isn't enough to make a trend.

Moreover, the market hasn't given up on new highs yet... and that's an important sign.

AI stocks have struggled this week, but the entire market didn't go into freefall. Stocks like Philip Morris International (PM), Procter & Gamble (PG), and Caterpillar (CAT) all rose.

Overall, consumer staples, real estate, and the much-beleaguered health care sector all posted positive returns.

In other words, the market rotated from overvalued, risky AI and tech stocks into more defensive sectors.

Health care, consumer staples... these are the kinds of things that institutions and big investors turn to when they want to stay invested... but also want to stay safe.

This is your textbook market rotation. We're moving from one set of sectors to another.

And that matters.

If investors started to worry about an AI slowdown and pulled all their money out of the market... well, that's a bad sign.

Big crashes happen when money comes out of the market. They happen when liquidity dries up and there are no buyers to swoop in and grab stocks as they fall.

But a market rotation is different. It's healthier. It means investors want to own equities... just different ones.

And given how AI companies, the Magnificent Seven, and the market's other biggest stocks have dominated returns recently, there are many quality businesses out there trading at affordable prices.

It would be extremely healthy for investors to rotate into sectors other than technology. That's the best way for this bull market to continue and for investors to dodge a crash.

So what does that mean going forward?

First, of course, you should continue to watch the AI story. It's still an important market driver today. And progress in intelligence and spending on data centers need to stay strong to keep these stocks propped up.

(And to be clear, I never said AI wasn't real and going to happen. But the important thing is that the rate of AI progress has a big effect on financial markets. And it will determine if the infrastructure buildout has gone too far. After all, we've seen that with new technology time and again.)

Second, even if AI stocks do continue to lag while other sectors rise... the broader market can prove resilient. It all depends on the strength of this rotation. That said, if these other sectors start to falter, we could be in for more pain.

Lastly, pay attention to interest rates. The Federal Reserve had a big meeting in Jackson Hole, Wyoming this week. Fed Chair Jerome Powell came out a bit more dovish than expected, and stocks rose.

Still, President Donald Trump has made it clear that Powell is a lame-duck chair. His term ends next May, at which point Trump will appoint a new chair.

It's almost inconceivable at this point that he won't appoint a motivated "dove" to drive interest rates lower... even if inflation threatens.

And if the market can hold up until then, it would certainly keep this bull market alive for quite a while.

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