The Gap Under the Market May Finally Be Starting to Close
A warning about AI growth may be the news needed for better action in the broader market.
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A chaotic Thursday session may have set the stage for better market action. Two notable news events moved the market.
The first was President Trump’s promise not to attack Iran before the midterms. “We will not be attacking Iran at any time prior to the Midterm Elections,” he posted on Truth Social. Brent crude had been accelerating to new highs on escalation fears, and the post pulled it well off its highs, though it still closed up nearly 4%.
The second was a Financial Times report that OpenAI told investors its annualized revenue run rate reached about $50 billion in September. That is about $20 billion short of the nearly $70 billion figure that circulated in late September. The headline caused an immediate reaction, sending chips, data centers and other AI infrastructure names lower.
The Rotation Was Immediate
What was most interesting was where the money went. Bonds and small-caps bounced right away. The disparity between the two tiers reversed partly because expectations for AI growth fell and partly because interest rates fell. Slowing AI growth and profitability relieves a primary source of inflation pressure and also triggers reallocation into lagging groups.
The big question now is whether this is the kickoff of a new trend as we move into earnings season and the positive seasonality of the fourth quarter.
The Oversold Story No One Is Telling
For the last several months, much has been written about how poor the market action has been in secondary stocks. What gets less attention is that many stocks are now in severely oversold technical conditions, making them ripe for a recovery if interest-rate pressure eases. Many stocks have been in a real bear market, and both the timing and market conditions suggest that pressure could ease.
Earnings season could hasten the rotational process. If the mega-caps struggle in reaction to their reports, that would be another tailwind for the beaten-down stocks, as money rotates out of the leaders and looks for somewhere else to go.
Game Plan
We are at an interesting juncture, and I’m increasing my vigilance. I want to see stabilization that shows the disparity between the AI leaders and everything else is starting to reverse.
My game plan is the same. I’m staying patient and waiting for better technical action, but I feel we are getting closer to the point where it’s time to increase my allocation to favored names. I’m not rushing to put large amounts of capital to work just yet, but I am increasing my selective buying.
At the time of publication, Rev Shark had no positions in any securities mentioned.
