S&P 500 Gets Another Heat Check as Rally Falters: Markets Wrap

(Bloomberg) — Wall Street’s relentless surge from April’s meltdown keeps showing signs that the stock market is overheated, spurring calls for a breather at a time when the classic dip-buying strategy stays firmly in place.

Nobody needs to look hard to find warnings that the market looks frothy after a 36% surge from April’s nadir pushed valuations to levels associated with periods of exuberance. While the AI euphoria has kept the party going for equities, recent chatter about a bubble forming in the group that has powered the bull market has drawn the attention from investors around the world.

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“While the ongoing excitement for AI and technology stocks continues to propel the market to new highs, we believe it is prudent to be vigilant in stocks that appear short-term stretched to the upside,” said Craig Johnson at Piper Sandler.

Underlying market breadth is showing early signs of fatigue, Johnson notes, adding it may lead to a consolidation phase as traders shift their attention toward the upcoming earnings season.

The S&P 500 fell to around 6,720. The yield on 10-year Treasuries rose three basis points to 4.15%. The dollar climbed toward a 10-week high. Silver hit $50 for the first time since the Hunt Brothers’ 1980 squeeze. Oil sank amid cooling tensions in the Middle East.

Traders also parsed remarks from Federal Reserve speakers, with Governor Michael Barr calling for a cautious approach toward further rate cuts. Fed Bank of New York President John Williams backed additional easing, telling the New York Times he’s closely watching the jobs market.

“It always seems like a sucker’s bet to put any money into the market when it’s trading at all-time highs,” said Bespoke Investment Group strategists. “As the seemingly intelligent pundits will say, the easy money has been made (even though they were never out there a year ago saying the easy money is about to be made).”

Since 1953, when the five-day trading week in its current form started, however, the S&P 500’s historical returns following a close at all-time highs are only slightly less positive than its average return for all periods since 1953, Bespoke said.

“The best strategy for passive investors, especially, is not to overthink things,” the strategists noted.

Worries have been compounding for the better half of the bull market in US stocks specifically around the concentration of Big Tech names that have driven the S&P 500’s valuation to bubble-like levels.

While valuations aren’t necessarily an ideal market-timing tool, with the group of “Magnificent Seven” megacaps surging about 260% since the start of the artificial-intelligence frenzy in late 2022, there’s been growing debate over how much further the AI trade can fuel the rally in equities.

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Never before has so much money been spent so rapidly on a technology that, for all its potential, remains largely unproven as an avenue for profit-making. And often, these investments can be traced back to two leading firms: Nvidia Corp. and OpenAI. While there have been some concerns that “circular” deals are creating a bubble, there’s not much evidence that suggests one is about to burst.

“Is AI a bubble? Not yet, at least not to the extent that I think a ‘pop’ is imminent,” said Tom Essaye at The Sevens Report. “This isn’t a valuation bubble like we saw with Pets.com and others in the late 1990s. It’s a capital expenditure bubble.”

There’s so much money being spent (and so much more promised to be spent) on AI infrastructure that it has become a large part of the US economy and the biggest driver of the multi-year bull market, he noted. The key to all this is “adoption,” Essaye added.

“When will regular people and businesses use AI the way we all (finally) used the internet to create money for thousands of varied companies? For the stock market, the answer is clear: The sooner, the better, and the clock is ticking,” he said.

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“Altogether, these deals point to hundreds of billions in investment commitments, reinforcing the sector’s rapid capital deployment and pace of innovation,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. “At the same time, market concern over ‘circular investments’ within AI companies and a potential AI-led stock market bubble has grown louder.”

While she agrees that the scale of the rally means volatility could pick up — and one should remain alert to signs of froth — she sees several compelling reasons for investors to stay engaged with the AI theme.

“So while the AI trade is not without its risks, we see compelling reasons to stay engaged. In our view, the rally remains underpinned by solid fundamentals, accelerating adoption, and a still-favorable macro environment,” she said.

‘Misplaced’

“One of the main reasons the AI bubble talk is misplaced is that the leading spenders continue to enjoy increased earnings power, according to Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research & Strategy Team.

“These aren’t the dot-com companies of a quarter-century ago that didn’t have earnings, or even viable business models,” he said. “That doesn’t mean the market won’t have setbacks, though. Investors may want to take a look at quality dividend-growth stocks.”

They’ve been out of favor for a while, but they could be a decent hedge if the market experiences a consolidation in the near term, Skelly concluded.

Even after a series of records to all-time highs, stock positioning data from JPMorgan Chase & Co. suggests some investors including hedge funds are holding back.

The equity beta of monthly reporting Macro hedge funds — an indicator of their exposure — remains modestly negative despite becoming slightly less so in recent months, the team led by Nikolaos Panigirtzoglou said.

The strategists added that speculative positioning in US equity futures is relatively close to their long-run median, after having been well above the median in 2024 and in the first quarter of 2025. This signals that overall exposure is only close to historical average rather than extended.

Some “light profit-taking” is understandable ahead of earnings season, but sentiment is still broadly positive, according to Fawad Razaqzada at City Index and Forex.com.

“Active traders continue to buy the dips, keeping momentum alive. You can see this in the shallow retracements and the steady string of record highs across the major indices. In this environment, looking for bearish setups feels counterintuitive – the market simply isn’t giving short-sellers much to work with,” he said.

To Razaqzada, the recent signals don’t necessarily point to an imminent selloff, but they do suggest that markets may need a breather – either through sideways consolidation or a modest pullback.

“For now, though, the underlying message remains the same: the trend is your friend. If you’re already long, there’s no reason to panic. If you’re not, patience may be the better play – wait for a pullback, then consider buying the dip.”

He also noted that the question now is whether the rally still has legs as we move into earnings season.

“With most economic data releases on hold due to the government shutdown, company earnings may have even more of an impact on market direction than usual. And as we get ready to kick off the third-quarter earnings season, it’s expected to bring another strong set of results,” said Liz Thomas, head of investment strategy at SoFi.

One of the datasets that will be critical to watch is profit margins amid persistent debate around the possible effect of tariffs on company results, she said. From a sector perspective, some of the strongest margins are expected to come from technology and communications, Thomas noted.

“In conclusion, third-quarter earnings season looks to be another set of strong results with companies likely surpassing expectations broadly,”she said. “If that ends up being the case, the rally has further support and the already high valuations of many stocks can remain high.”

With the onset of reporting season approaching, Ryan Grabinski at Strategas noted that we’ll be in the “peak buyback blackout window” over the next two weeks.

“This potentially opens up the window for a period of weakness when accounting for growth fears,” he said. “On a positive note, the corporate bid should reassert itself by early November as we head into year end.”

US stocks are likely to continue climbing into year-end as robust corporate earnings — particularly in megacap technology giants — keep driving shares higher, according to Nuveen Asset Management’s chief investment officer.

For equities, the fourth quarter “is normally a strong quarter, especially when we’re up substantially year to date,” Saira Malik said in an interview with Bloomberg Television on Thursday. “So odds are in your favor for this rally to continue.”

Corporate Highlights:

The US has approved several billion dollars worth of Nvidia Corp. chip exports to the United Arab Emirates, an initial step in implementing a controversial deal that could serve as a blueprint for American AI statecraft. OpenAI has raised concerns with European Union antitrust enforcers over potentially harmful conduct by the likes of Alphabet Inc.’s Google, Microsoft Corp. and Apple Inc. Google’s cloud unit is launching an artificial intelligence platform called Gemini Enterprise that it hopes will reach everyday workers, setting up a deeper competition with Microsoft and OpenAI for business tools. Amazon.com Inc. is rolling out an updated version of its main artificial intelligence tool for business, the latest effort to grab a slice of the market for software designed to automate and speed up office work. US auto safety regulators are investigating Tesla Inc. over incidents in which its vehicles drove through red lights and violated other traffic laws while using the company’s partial-automation software. Intel Corp., the embattled chipmaker now backed by the US government, introduced new products and manufacturing technology that are central to its turnaround bid. Salesforce Inc. is launching a product for information technology management, moving into a new area for the company’s software and deepening its competition with ServiceNow Inc. UnitedHealth Group Inc. plans to acquire a 45-doctor medical practice in Massachusetts in a sign that its Optum division will keep adding doctors despite turmoil in the business. Paramount Skydance Corp. Chief Executive Officer David Ellison, who is reportedly weighing a merger with Warner Bros. Discovery Inc., said he sees a lot of opportunity for consolidation in the industry. Warner Bros. Discovery Inc.’s film chiefs Michael De Luca and Pamela Abdy, fresh off the renewal of their contracts, confirmed that the studio will make a sequel to this year’s hit A Minecraft Movie. Delta Air Lines Inc. predicted continued strong demand into next year after reporting better-than-expected earnings for the third quarter, helped by leisure travelers splurging on premium seats and a rebound in corporate travel. Citigroup Inc. rejected an offer from mining magnate German Larrea’s conglomerate, Grupo Mexico SAB, to acquire its Grupo Financiero Banamex business. Lyft Inc. is partnering with autonomous vehicle developer Tensor Auto Inc. to deploy a fleet of hundreds of robotaxis in Europe and North America starting in 2027. PepsiCo Inc. said it is working to cut costs and overhaul its portfolio to meet consumers’ shifting tastes, while it engages in discussions with an activist investor. Costco Wholesale Corp. rose after the warehouse club reported comparable sales growth that beat analyst estimates for September, helped by a rise in both foot traffic and amount spent per customer. The Trump administration is considering whether to take a major step toward restricting the US operations of TP-Link Systems Inc., a China-linked router-maker whose Wi-Fi equipment is popular in the American market, according to people familiar with the matter. The rally in shares of US miners of rare-earth materials got a boost Thursday after a China curb on exports of the minerals fueled bets that the American industry will benefit — and potentially spur additional investments from the federal government. Marathon Asset Management LP bought the term loan of collapsed First Brands Group at around 40 cents on the dollar and sees it as a “great company” with a bad balance sheet, Chief Executive Officer Bruce Richards said. Novo Nordisk A/S agreed to buy Akero Therapeutics Inc. for as much as $5.2 billion to expand its portfolio in a type of liver disease that’s linked to obesity. Taiwan Semiconductor Manufacturing Co. reported a 30% increase in its third-quarter sales as major US tech companies continued to make multibillion-dollar bets on AI. Some of the main moves in markets:

Stocks

The S&P 500 fell 0.4% as of 3 p.m. New York time The Nasdaq 100 fell 0.4% The Dow Jones Industrial Average fell 0.6% The MSCI World Index fell 0.5% Bloomberg Magnificent 7 Total Return Index fell 0.2% The Russell 2000 Index fell 0.9% Currencies

The Bloomberg Dollar Spot Index rose 0.5% The euro fell 0.7% to $1.1548 The British pound fell 0.9% to $1.3281 The Japanese yen fell 0.3% to 153.18 per dollar Cryptocurrencies

Bitcoin fell 1.7% to $120,766.91 Ether fell 4.2% to $4,313.62 Bonds

The yield on 10-year Treasuries advanced three basis points to 4.15% Germany’s 10-year yield advanced two basis points to 2.70% Britain’s 10-year yield advanced four basis points to 4.75% The yield on 2-year Treasuries advanced one basis point to 3.59% The yield on 30-year Treasuries advanced three basis points to 4.73% Commodities

West Texas Intermediate crude fell 1.8% to $61.40 a barrel Spot gold fell 2.1% to $3,958.09 an ounce ©2025 Bloomberg L.P.