Will Palantir Earnings and Poor Breadth Trigger a Market Correction?
Here's what to watch and what could indicate more downside.
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The market flashed a warning sign on Monday as a small group of mostly big-cap AI-related names covered up broader market weakness. It appears to be only the second time ever that the Nasdaq hit a new all-time high with breadth at more than two-to-one negative.
The only other time this has happened was on November 18, 2021, which was one day before a significant market high that led to a downtrend that lasted over a year and didn't end until January 2023.
I don't give much weight to historical comparisons like this, but it could be a short-term issue, especially as earnings season for key AI plays winds down.
One of the leaders of the AI sector has been Palantir Technologies (PLTR) . The stock has run up 150% so far in 2025 and is ripe for a sell-the-news reaction. The earnings report was solid, with beats on both revenue and EPS estimates, and the company raised guidance for the remainder of the year. There are also some price target increases, with Bank of America going to $255.
Regardless of the very positive news, Palantir is not a cheap stock. It is trading with a trailing P/E of 313 and is expecting EPS growth of just 36% in 2025. The only way that valuation can be justified is if the company keeps beating expectations at very high levels.
Analysts at Jefferies raised their target to $70 and said the valuation of Palantir's shares is "extreme." The firm likes Palantir's fundamentals but sees an unfavorable risk/reward. It prefers Microsoft (MSFT) and Snowflake (SNOW) for exposure to artificial intelligence.
With growing questions recently about the profitability of AI in general, conditions are ripe for profit-taking on this positive news. There was a little of this last week on some of the Magnificent Seven (MAGS) reports, but with the very weak breadth, there is much greater danger now of deeper corrective action.
We will see how this develops, but keep an eye on support levels and possible dip buying. A weak close by Palantir and the indexes are a likely indication of more downside to come.
At the time of publication, Rev Shark had no positions in any securities mentioned.
