The AI Magic Is Gone: How to Play a Market Waiting for New Leadership
After a sell-the-news reaction to Nvidia's earnings, corrective action will dominate until a new leader steps up.
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The market has been struggling for the past five sessions, but the ugliness intensified on Thursday.
There have been ongoing concerns about tariffs, and there are also signs that unemployment is increasing, growth is slowing and inflation is sticky. However, the primary problem on Thursday was a sell-the-news reaction to a solid Nvidia NVDA earnings report.
Analysts were pleased with the Nvidia report, and several of them raised their price targets and made positive comments, but the problem is that the AI theme has lost its magic. There will still be massive spending on AI infrastructure, and many very profitable applications will be developed in the future, but like the internet theme in 2000, expectations have become overheated, and valuations are stretched.
The Magnificent Seven MAGS stocks have seen this coming for a while. The group topped out on December 18, 2024, and has been struggling for the last couple of months. The selling accelerated on Thursday, with Nvidia leading the decline with a drop of around 8.3%.
The AI problems spilled into the entire technology group and dragged down the Nasdaq 100 QQQ by about 2.6%. The Russell 2000 IWM was hit for a loss of 1.5% and is now at its lowest point since September 2024.
The most worrisome aspect of Thursday's action was the poor breadth. Recent drops have been mildly negative breadth, but on Thursday, there were only 2,300 gainers to around 7,300 decliners. New 12-month lows hit 440.
The bottom line is that we are experiencing a correction, and one key factor is that AI and the Magnificent Seven are no longer leading the market. I’ve been hoping that there would be a rotation into new leadership, but that has not happened, and there are no signs of another group stepping up.
The market will need some time to resolve this, so it is important to protect capital and stay patient while better technical conditions eventually develop.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
