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Rotation has made the market so extremely volatile that a single social media post can trigger bigger swings than a geopolitical escalation in the Middle East or the Supreme Court's reversal of Donald Trump's tariffs. Is artificial intelligence a bullish factor for the US economy or a bearish one? Or is it so bullish that it becomes bearish? Viral reckonings from Citrini Research knocked S&P 500 prices down.
US stock dynamics
For decades, human intelligence was one reason capital flowed into the US stock market. But the emergence of artificial intelligence is breaking the old framework. Lotus Technology Management estimates AI advances could lead to 5% layoffs among white-collar workers over the next 18 months. Significant labor market weakening in the past has led to recessions. The company urges the government to protect workers from AI by raising taxes on tech firms.
As Nassim Taleb, author of The Black Swan, put it, what's happening now doesn't look like a small correction. It resembles a major drawdown because recent S&P 500 profits have been generated by a handful of issuers. The risks from the rest of the broad index were underpriced. Those stocks are now being actively bought as part of rotation. But should they be?
The situation is increasingly compared to the dot-com crisis. A quarter century ago, the economy surged on the back of internet adoption and internet valuations were ignored — until the S&P 500 crashed. Over recent years, the forward price-to-earnings ratio for the broad index rose rapidly. Without rotation, that metric would have reached 1999 levels by the end of 2026.
Current P/E dynamics for the S&P 500
The S&P 500's P/E now stands at 21.4, down from 24 at the end of October. Since ChatGPT's launch in November 2022, the forward P/E climbed rapidly. The shift away from the tech giants toward small?cap stocks pushed it down. Does that mean we won't see a bubble bursting like at the turn of the century?
Adding fuel to the S&P 500's fall is uncertainty around the White House's tariff policy. Donald Trump has threatened to play hardball with trade partners by imposing larger tariffs, yet new levies might also be struck down by the Supreme Court. The administration justified tariffs by citing a US balance?of?payments crisis that, in reality, does not exist.
Technically, on the daily chart the S&P 500 bounced off resistance at the pivot level of 6,910, which allowed short positions to be established on the broad index. A drop below 6,815 would justify increasing those positions.
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