AI Valuation Concerns Are Back as Government Reopening Rally Cools
Indexes are running into technical overhead resistance after sizable bounces.
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Investors have enjoyed a sizable rally due to hopes that the record-setting government shutdown is coming to an end. The Senate cleared the first hurdle late on Monday, and the House is set to vote on the next installment on Wednesday.
The reopening news powered the Nasdaq 100 to a gain of more than 4% from the lows on Friday to the highs on Monday. The Magnificent Seven (MAGS) led the charge as recent concerns about valuations in the AI sector were forgotten.
The question now is whether the market can build on this surge and take the indexes back to the highs reached a couple of weeks ago.
Maybe, but market conditions have shifted, and some headwinds may make the bull’s quest more difficult.
The first headwind is that valuation in the AI sector has not been resolved. Japan-based SoftBank Group announced last night that it has sold its entire position in Nvidia (NVDA) for $5.8 billion and will use the cash to make internal investments in AI.
In addition, data-center giant CoreWeave (CRWV) is trading lower after cutting revenue guidance. JPMorgan (JPM) downgraded the stock to neutral with a $110 price target due to supply-chain pressures.
These two issues are helping to cause early pressure on the Mag 7 names early on Tuesday.
The second issue that will come into focus now that the government shutdown is close to being resolved is that delayed economic reports will soon be issued. One of the first reports expected is the jobs data from October. If this report confirms recent news of increased layoffs, it will bolster the chances of a rate cut, but lingering concerns about inflation may keep the Fed's plans murky.
Technically, the indexes have enjoyed a good bounce, but there is now technical overhead to contend with. In recent years, there has been a tendency for a V-shaped bounce that rendered that overhead meaningless, but this current bounce may not have the juice to power through those resistance levels as easily, especially if there is continued debate about AI valuations and economic health.
There is hope that end-of-the-year seasonality will provide some support for more upside, but it is important to remember that seasonality is not a sure thing. It is a tendency, but even when it does occur, there can still be high levels of volatility.
While the market mood looks less buoyant on Tuesday morning, after the strong bounce, there is some increased fear of missing out on further recovery. If the Mag 7 fizzles out on valuation concerns again, then the chances of a retest of the recent lows are elevated.
At the time of publication, Rev Shark had no positions in any securities mentioned.
