Stock Rally Hits a Wall Amid Signs of Overheating: 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 6,740. The yield on 10-year Treasuries rose two basis points to 4.13%. The dollar climbed toward a 10-week high. Silver hit $50 for the first time since the Hunt Brothers’ 1980 squeeze.

“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.

Still, with the group of “Magnificent Seven” megacaps surging about 260% since the the launch of ChatGPT in 2022, there’s been growing debate over how much further the AI trade can fuel the rally in equities.

Bubble Chatter

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. “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.”

The key to all this is adoption, Essaye noted.

“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.

“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 AI 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. “

She recommends maintaining balanced exposure to AI-aligned companies across software, hardware, and semiconductors, with diversified positioning across enabling, intelligence, and application layers.

‘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.

While stocks are still holding near record highs, 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.

“This suggests that speculative investors’ exposure to US equities is not particularly elevated and in principle has room to rise,” they said.

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.”

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. 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 Corp. and OpenAI for business tools. 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. 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. 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. reported stronger than expected net revenue as its US beverage unit showed signs of a turnaround. PepsiCo 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. US-listed rare earth stocks climbed after China unveiled new restrictions on exports ahead of a meeting this month between Donald Trump and Xi Jinping. Ferrari NV shares plunged after the carmaker issued cautious forecasts that disappointed investors, marring a coming-out party for the company’s first electric vehicle. ASML Holding NV named Marco Pieters chief technology officer of the chip-equipment company, plugging a vital gap in management at Europe’s most-valuable technology firm Orsted A/S will cut about 2,000 jobs — roughly a quarter of the workforce — as the offshore-wind company narrows its focus to Europe after completing a massive share sale to shore up funds. EssilorLuxottica Chief Executive Officer Francesco Milleri says he’s positioning the world’s biggest eyewear company to be leader in the emerging category of AI glasses, which he sees potentially replacing smartphones as the next consumer-tech blockbuster. 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. Ottobock SE & Co. shares rose in the prosthetics firm’s debut trading session in Frankfurt on Thursday, after the biggest initial public offering in Germany in more than a year. 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. Tata Consultancy Services Ltd. reported a 1.4% increase in quarterly earnings on sluggish demand for IT services, as it braces for the impact of changes in a widely used US visa program. Some of the main moves in markets:

Stocks

The S&P 500 fell 0.2% as of 12:02 p.m. New York time The Nasdaq 100 fell 0.3% The Dow Jones Industrial Average fell 0.3% The Stoxx Europe 600 fell 0.4% The MSCI World Index fell 0.3% Bloomberg Magnificent 7 Total Return Index fell 0.4% The Russell 2000 Index fell 0.2% Currencies

The Bloomberg Dollar Spot Index rose 0.3% The euro fell 0.6% to $1.1563 The British pound fell 0.7% to $1.3313 The Japanese yen fell 0.2% to 153.00 per dollar Cryptocurrencies

Bitcoin fell 1.3% to $121,348.64 Ether fell 4% to $4,322.49 Bonds

The yield on 10-year Treasuries advanced two basis points to 4.13% 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 one basis point to 4.72% Commodities

West Texas Intermediate crude fell 0.9% to $61.99 a barrel Spot gold fell 0.6% to $4,019.39 an ounce ©2025 Bloomberg L.P.