Investors Reassess AI Stocks Amid Jobless Claims Data

Good Morning Investors,

The anticipated consolidation continues as markets extend their pullback for a third consecutive session, with S&P 500 ($SPY ( ▼ 1.02% )) futures down 0.3% and the Nasdaq ($QQQ ( ▼ 1.22% )) declining 0.4% in pre-market trading. This healthy correction aligns with my expectation for modest weakness following the Fed's initial rate cut, creating the strategic positioning opportunities I've consistently highlighted.

Pre-market weakness reflects continued profit-taking in AI leaders, with Nvidia ($NVDA ( ▲ 0.91% )) declining nearly 1% and Oracle ($ORCL ( ▼ 4.57% )) dropping 2% as investors reassess valuations following the recent AI infrastructure rally. This sector rotation away from momentum names demonstrates the market's maturing price discovery process rather than fundamental deterioration.

Today's economic calendar features critical unemployment data, with initial jobless claims providing crucial insights into labor market dynamics that increasingly drive Fed policy decisions. Chair Powell's Tuesday emphasis on employment risks over inflation concerns reinforces the central bank's dovish bias despite current market volatility.

Wednesday's 0.3% S&P decline and 0.4% Dow ($DIA ( ▼ 1.63% )) retreat represent the normal consolidation phase I anticipated following consecutive record highs. Historical patterns following Fed rate cuts typically show 1-3 months of sideways to lower action as markets digest previous gains before resuming upward momentum.

The current pullback serves multiple constructive purposes: resetting stretched valuations, clearing speculative positioning, and creating entry opportunities for quality names. Rather than signaling fundamental weakness, this consolidation demonstrates healthy market function after an exceptional run.

Market bears rushing to dot-com bubble comparisons miss the fundamental strength underlying current valuations. The S&P 500's 14.3% year-to-date gain breaks down instructively: earnings growth contributed around 7.9 percentage points, multiple expansion 5.3 points, and dividends 1.1 points.

This analysis reveals that 63% of returns stem from actual profit growth and distributions, not speculative excess. The earnings component further decomposes into 5.1 points from sales growth and 2.8 points from margin expansion, demonstrating both economic expansion and operational leverage, precisely the combination that justifies premium valuations.

Companies continue demonstrating pricing power and efficiency gains despite tariff uncertainty and rate volatility, validating the operational excellence thesis I've consistently emphasized.

The recent decline in Nvidia and Oracle reflects healthy skepticism about circular AI relationships rather than fundamental demand destruction. These corrections create opportunities to separate genuine AI infrastructure leaders from momentum-driven participants.

Alibaba's ($BABA ( ▼ 1.08% )) expanded partnership with Nvidia demonstrates global AI adoption acceleration, while the company's increased AI spending commitment reinforces the structural nature of this transformation. The 8% surge in BABA shares following these announcements suggests international AI adoption remains underappreciated by markets.

Chair Powell's Tuesday remarks emphasizing labor market risks over inflation concerns validate the accommodative policy path. His observation of "marked slowdown" in job market dynamics and rising "downside risks to employment" signals continued dovish bias despite current market volatility.

Today's jobless claims data becomes increasingly critical as the Fed's dual mandate shifts toward employment preservation. While I don't anticipate dramatic deterioration, any meaningful uptick could accelerate the cutting cycle and support risk assets medium-term.

Lithium Americas' ($LAC ( ▲ 1.33% )) 96% surge following reports of potential Trump administration equity stakes demonstrates evolving government industrial policy. The proposed $2.3 billion loan converting to 10% ownership with GM purchase guarantees represents active rather than passive federal involvement.

This model, following similar Intel arrangements, suggests systematic government participation in strategic industries. Companies with domestic exposure and critical supply chain positioning benefit from this policy evolution, creating sectoral investment themes beyond traditional valuations.

Bank of America's Wednesday analysis arguing for "new normal" valuations deserves serious consideration, and I find significant validity in their framework. The firm highlights structural S&P 500 improvements: lower debt-to-equity ratios, reduced earnings volatility, and asset-light business models that justify premium multiples.

Their argument aligns with observations I've consistently made about fundamental market changes since 2020. The dramatic increase in retail participation has fundamentally altered market dynamics in ways that support higher baseline valuations. Today's retail investors demonstrate markedly different behavior patterns: increased risk tolerance, persistent "buy the dip" mentality, and comfort investing in high-PE firms that would have deterred previous generations.

Crucially, retail investors don't fear selloffs, they view them as purchasing opportunities. This behavioral shift creates structural demand that supports elevated multiples during volatility and accelerates recovery phases. When combined with corporate operational improvements and AI-driven efficiency gains, these dynamics suggest higher equilibrium valuations may indeed represent a new baseline rather than temporary aberration.

The shift from offshoring to domestic operations may reduce dramatic growth but increases durability, a trade-off that both institutional and retail investors increasingly value in an uncertain geopolitical environment.

Tonight's Costco ($COST ( ▲ 0.08% )) earnings provide crucial consumer spending insights, particularly important given mixed discretionary signals. The company's membership model offers recession-resistant characteristics valuable during economic uncertainty.

Friday's PCE inflation data remains the week's key catalyst, though Fed focus has clearly shifted toward employment metrics. Housing data throughout the week offers real-time assessment of rate sensitivity as mortgage rates approach yearly lows.

I maintain my 6,800 S&P 500 year-end target while using current weakness as strategic positioning opportunity. The consolidation I anticipated creates better entry points for quality names rather than cause for fundamental concern.

Focus continues on companies demonstrating AI integration, domestic exposure benefits, and operational excellence. The recent rotation away from pure momentum plays toward fundamentally sound businesses aligns with my preference for quality over speculation.

This week's pullback represents healthy market function rather than fundamental deterioration. The combination of robust earnings growth, Fed accommodation, and structural economic improvements supports continued equity outperformance despite elevated valuations.

Bank of America's "new normal" valuation argument merits consideration, though I maintain disciplined targets allowing for continued consolidation. Use current weakness strategically as the fundamental case for risk asset strength remains compelling through year-end.

The anticipated bank earnings season in coming weeks should demonstrate the operational excellence justifying current premium valuations, while Fed policy accommodation provides the monetary backdrop for continued gains.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.

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