• The S&P 500 was set for its longest losing streak since August, as a six-month rally shows signs of cracking following a $1.2 trillion selloff in cryptocurrencies and fears around stretched artificial intelligence valuations.
• Futures tracking the S&P 500 were down 0.4% at 8:26 a.m. in New York, putting the benchmark on course for a fourth day of declines as investors reconsider their optimistic expectations for Federal Reserve interest-rate cuts.
• The chorus of warnings about a possible AI bubble grew louder after JPMorgan Chase & Co. Vice Chairman Daniel Pinto warned that valuations in the industry could be due for a correction.

The S&P 500 was set for its longest losing streak since August, as a six-month rally shows signs of cracking following a $1.2 trillion selloff in cryptocurrencies and fears around stretched artificial intelligence valuations.

Futures tracking the S&P 500 were down 0.4% at 8:26 a.m. in New York after earlier dropping as much as 0.8%, putting the benchmark on course for a fourth day of declines as investors reconsider their optimistic expectations for Federal Reserve interest-rate cuts. Futures on the technology-heavy Nasdaq 100 Index also slipped 0.5%.

Asian and European stock indexes fell, while Bitcoin briefly dropped below $90,000 for the first time in seven months. Meanwhile, a Bank of America Corp. survey showed that fund managers’ cash holdings have fallen to low levels that have triggered a sell signal in the past.

“Appetite for AI is under pressure from circularity worries and bubble fears,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. “The bad news is that some of the more bullish vibes — AI enthusiasm, massive government stimulus, dovish central-bank expectations — are starting to fade.”

The chorus of warnings about a possible AI bubble grew even louder on Tuesday after JPMorgan Chase & Co. Vice Chairman Daniel Pinto warned that valuations in the industry could be due for a correction. “That correction will also create a correction in the rest of the segment, the S&P and in the industry,” Pinto said at the Bloomberg Africa Business Summit in Johannesburg.

US stocks have come under pressure this month as investors worried the AI-led rally has run too hot. The S&P 500 is trading at about 22 times forward earnings, above its 10-year average of 19. Concerns are also rising about the economic impact of the longest US government shutdown.

Cryptocurrencies, meanwhile. have slumped, with many smaller coins nursing losses in excess of 50% for this year. Digital tokens have lost a combined $1.2 trillion of market value since Bitcoin peaked in October, figures from CoinGecko show.

Dip Buyers

Investors have so far been keen to buy the dip given underlying optimism about US economic growth. On Friday, the S&P 500 reversed losses of as much as 1.4% to end the day little changed and a similar swing looked possible on Tuesday too, as futures rebounded off their session lows.

“We tend to treat market retrenchments as a buying opportunity,” said Marija Veitmane, head of equity research at State Street Global Markets. “The economy is strong enough to support robust earnings growth and yet weak enough to warrant rate cuts.”

Still, results from Home Depot Inc. offered a warning to investors about the strength of US consumers after the world’s largest home-improvement retailer cut its full-year earnings outlook. There’s also higher demand for bearish bets on technology stocks, suggesting faltering confidence in a sustainable rally.

Heavy spending on AI is also raising worries about companies’ capacity to finance such bills. Credit spreads for Oracle Corp. have soared to the highest in nearly three years. In a further sign of growing worries about the space, Microsoft Corp. and Amazon.com, Inc. were both downgraded to neutral from buy at Rothschild & Co Redburn, which said the bull case for generative AI is no longer clear.

BofA’s warning of a potential sell signal came as fund managers’ average cash holdings fell to 3.7%, something that has only occurred 20 times since 2002. Stocks fell and Treasuries outperformed in the following one to three months each time that has happened in the past, BofA strategists said in a note. The survey also showed that for the first time in 20 years, investors said companies are overinvesting.

Nvidia Test

The S&P 500 is now about 3% below its October peak. On Monday, the benchmark index closed below its 50-day moving average for the first time since April. Market breadth has also weakened, with only 54% of S&P 500 constituents trading above their 200-day moving average, according to data compiled by Bloomberg.

All eyes are now on AI bellwether Nvidia Corp.’s quarterly earnings report due Wednesday. Meanwhile, swaps traders have pared bets on the possibility of a Fed rate cut in December.

For Matt Britzman, senior equity analyst at Hargreaves Lansdown, the longer-term outlook for stocks remains intact.

“Pullbacks are never fun but are often healthy, especially in a market that’s showing signs of frothiness,” he said.

Here’s what other market participants are saying about the outlook for US stocks:

Homin Lee, a senior macro strategist at Lombard Odier

“We believe that the nervousness will persist until the September employment report provides greater clarity. At the current juncture, a soft US labor market data or a large beat in Nvidia earnings could help.”

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg

“Crypto market turmoil has increased equity volatility, while the Fed’s mixed signals on rates keep investors wary. AI remains a key growth driver, but concerns over potential earnings disappointments and valuation pressures persist. Overall, stocks face a delicate balance between positive AI momentum and macroeconomic caution as the year closes. We remain cautiously optimistic though, given likely strong buyback and flow support over coming weeks.”

Mary-Sol Michel, a director a Swiss Life Gestion Privée in Paris

“We were expecting a drawback to occur but a bit earlier earlier than this. We had therefore already cut some positions, notably on ASML and Alphabet. The selling isn’t usual in terms of seasonality as typically at this time of the year people are expecting a year-end rally. We’re staying invested in tech, but we decided to take profits to secure our performance this year. There’s a lot of nervousness in the tech segment.”

Eric Bleines, a fund manager at SwissLife Gestion Privée

“The question is whether the selloff will continue after Nvidia’s results: this will make the difference between the market just taking a breather or going for a correction.”

Joachim Klement, a strategist at Panmure Liberum

“Stock markets in the US and UK are still underpinned by solid fundamentals and in the US, weaker jobs data for September could revive the bets for a December rate cut by the Fed. US stocks will be supported by Fed rate cuts, though these will benefit US value stocks more than the expensive tech sector.”

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