US Stocks Risk a Bearish Correction After Recent Weakness

Weakness in the S&P 500 on Monday and Tuesday saw further weakness on Friday, and the S&P 500 risks a bearish correction. 

SP 500 – Daily Chart

SP 500 – Daily Chart

The S&P 500 closed below the 5,000 level on Friday, and support lies at the 4,800-4,820. 

The big story in the week ahead will be AI chip leader Nvidia’s earnings. Excitement over the potential of AI has helped Nvidia’s shares to rise more than 46% since the start of the year. The company’s $570 billion market cap increase has made Nvidia the third-largest company on Wall Street behind Apple and Microsoft. 

Other AI stocks have followed, with Super Micro Computer up 182% year-to-date and Arm Holdings up nearly 71%. 

“When people say that the market is doing well this year, they really mean that tech is doing well, and Nvidia is at the core of that,” said Keith Lerner, chief market strategist at Truist Advisory. “There is excitement within AI and if that optimism is not fulfilled by earnings, then you could see that reverberate quickly and weigh on sentiment.” 

Nvidia releases earnings on February 21. Analysts expect earnings of $4.56 a share and a rise in revenue to $20.378 billion from $6.05 billion a year ago. 

Legendary investor Jeremy Grantham believes the AI bubble will pop.  

“Everyone is ordering these chips to facilitate AI. They don’t know what they’re going to use the chips for yet. It’s like selling shovels in the gold rush.” 

Grantham pointed to ratios at the higher end of historical measures and said that sustainable bull markets have never started from there. 

World turmoil is also a threat to the stock rally, with Bloomberg analysis of hundreds of earnings calls noting an increase in references to the Red Sea or “geopolitics”. 

Bank of America’s latest fund manager survey also showed that investors see geopolitics as the second most significant risk to share prices after inflation, though the two dangers are connected. Surveyed managers expect a further escalation in the Red Sea or Middle East to add new price pressures to oil and freight rates. 

The US stock market has seen some selling emerge after the recent record highs, and investors should be cautious. There are external risks in the world, but a weak earnings release from Nvidia could see a sharp unwind in the price of stocks that have led the market over the last year.

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