3 Big Issues Collide With Poor Market Conditions
New concerns about AI growth are hitting on Monday morning. Here’s my game plan.
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Following a rebound Friday, the market is under pressure Monday morning as several major negatives hit at the same time. The indexes are technically vulnerable and we are already struggling with negative seasonality, so there is potential for some significant downside if buying support does not appear.
Indexes are indicated lower Monday morning with the Nasdaq 100 off more than 1.7%, while oil is up but bonds are steady. The Fed interest rate decision is on Wednesday afternoon at 2 pm ET.
The key question is whether these negatives are already discounted to some extent. The indexes have been struggling for two weeks but they have not been under extreme pressure. Friday’s rebound on a hot CPI was a sign the market had seen the rate hike coming, but Monday morning that Friday bounce looks more like a knee-jerk response rather than a durable low.
Three Negatives at Once
We have three key issues hitting.
The first is the AI trade. Over the weekend the leaders of the three largest AI companies called for the pace of AI development to be slowed. Sam Altman and Elon Musk agreed with a warning from Anthropic’s Dario Amodei about the risks of moving too fast. Separately, there are reports that Anthropic, OpenAI, and Google (GOOGL) have quietly discussed an AI safety standards body.
The market’s immediate response is concern that AI development will slow and that will hurt economic outcomes. The entire AI trade assumes that development keeps accelerating and the appetite for chips, memory, and infrastructure keeps compounding. If the companies building it are the ones calling for restraint, that raises a question about whether the demand the market is anticipating is overstated.
So far nothing has actually changed in any AI capex plans. The hyperscalers have not changed the guidance of about $1.3 trillion in capital spending for 2027 that was established two weeks ago, but there are now doubts that this number will hold.
The second issue is oil again. Brent is above $108 after Saudi Arabia shut its East-West pipeline following drone attacks. That strike was unverified Friday and is now confirmed. A planned meeting between Gulf states and Iran was postponed, so the diplomatic path stalled again, and there is no end in sight to the problem.
The third issue is the Fed. A hike Wednesday is now close to certain, with year-end odds at 97.6%. The 10-year is sitting at 4.97%, a hair under 5%.
Unfortunately a quarter-point hike isn’t going to suddenly solve all the economic issues out there. Inflation is not going to suddenly stop due to one small hike. Also, there is a strong argument that a hike is the wrong move.
The economy is already growing near its potential and operating at full employment, with unemployment just above 4%. Inflation is too high at above 3%, but much of that is the fallout from higher energy prices and tariffs. Those are supply shocks that rate hikes will not fix. They should fade on their own as long as inflation expectations stay anchored, which they have. If the Fed tightens to bring inflation down faster, it has to push growth below potential, and that is hard to do without layoffs and rising unemployment.
A further complication is highlighted by the AI news this morning. AI-related investment is the power behind this economy while the non-AI economy is already struggling. To hit its inflation target, the Fed either has to slow the AI boom or put even more pressure on the part of the economy that is already weak. Neither is an attractive course of action.
That is the risk in Wednesday’s decision. The market has priced the hike, so the surprise is not whether it happens. The negative implication is the Fed hiking into supply-driven inflation it cannot control and slowing an economy that is only being held up by one sector. The bond market may be pricing in a policy mistake as much as it is pricing inflation.
Are These Already Discounted?
How much bad news is already priced into this market? That is the question and the answer is murky at best. The market has been grinding lower for two weeks, which suggests that a good deal of the bad news is in. But grinding lower is not the same as washing out, and none of these three negatives has been fully absorbed.
The AI slowdown story is new this weekend. The oil escalation has been happening for months and is still escalating. The Fed decision was highly uncertain just a few weeks ago.
A market that had truly discounted this bad news should find some support fairly fast, but there is clear concern in the air early on Monday. We will have to wait and see what happens as the day progresses, and a weak close will be a major problem.
Game Plan
I am not doing much here and I am comfortable with that. Friday told me the market wanted to rally on certainty about the Fed. Monday morning is telling me that certainty about the Fed isn’t enough when oil is still rising and we have new concerns about the AI trade.
The setups I want to buy are still developing as the market digests this news flow. There is not much to do but wait. The Fed decision on Wednesday is the next big catalyst and we’ll have to see how things look after the news. Only gamblers bet on the outcome at this point.
At the time of publication, Rev Shark had no positions in any securities mentioned.
