The correction continues. Dip buyers are still on the sidelines this morning.
It’s an AI-driven pullback. Today, the even-weighted S&P is in the green. For the trailing week, the even-weighted S&P is down 0.9%, the market-weighted -2.4%. The Magnificent 7 is down 4.5% for the trailing week, but is still positive 0.5% for the trailing month. That’s what’s been taken back. Same for the NASDAQ; down 4.3% in a week, down 0.2% in a month.
Given the froth of valuations, this is a healthy correction, more of a reversion to the mean than an indictment of the AI narrative. Retail investors parking major investments into S&P ETFs are certainly feeling the correction, but were also responsible for driving up levels with the high inflows trying to get in position for a strong year-end.
Within Mega Tech, the outlier has been , which hasn’t committed billions to its own data centers. It’s in the green for the trailing week and up 5.5% for the trailing month (+8.6% YTD). Compare this with , the poster child for AI, now down 10.7% for the week, -1.3% for the month (+36% YTD). Overall, semiconductors are down 6.1% for the week, +2.1% for the month (+41.6% YTD).
AI is still coming, and along with it will be continued conversions of jobs into software, and the labor statistics will likely continue to be challenging, even with strong economic growth. An uncertainty here is whether rising unemployment impacts top line growth enough to offset rising profit margins?
Another challenge we have is the persistently high , which are freezing out the real estate market where so many homes have sub-4% mortgages, as well as hitting commercial properties, rolling over mortgages into higher rates than those put on 5 years ago. US rates are substantially higher than most other developed countries.
The Fed’s firm stance on achieving 2% before taking rates down significantly is problematic, complicated by all the new tariffs making forecasts difficult. When rates finally come down, important industry sectors should see a solid rebound. Today, the US 2-year is 2 bps lower (3,54%) and the 10-year is down 1 bp (4.08%). The US dollar index is below 99.4, the lowest level in November.
Today’s further correction finds the VIX grinding higher, well above 21, up from near 17.5 just 2 days ago. and silver are modestly higher, as are and natural gas. Crypto remains stressed, with Bitcoin dipping below $100K before bouncing to $101K.
As the trading day rolls on, stock indexes are rolling over to lows after a couple of attempts at a bounce. Dip buyers are not showing up, waiting for a firm bottom to form. Investors are also waiting for the government shutdown to end as the pain increases. Today, flights are being reduced (748 flights, 3% of total) by the FAA due to labor constraints at airports. The Supreme Court challenge of tariffs is also unresolved. As we test the 50-day moving average of the S&P for the first time since April, we are at a technical crossroad of a possible full correction, where dip buyers become dip sellers.
The ace in the hole here is the strong earnings season. There is a distinct possibility that we will look back on today’s 6,650 S&P as a true buying opportunity before year-end.