S&P 500 Index Rally Hits a Wall Amid AI Jitters as Key Valuation Metric Dips

The S&P 500 Index pulled back to 7,530 on Friday, its lowest level since September 16 and 4% below its all-time high. It had earlier hit a major barrier at 7,830 as AI jitters spread, even as corporate earnings gained momentum and its forward price-to-earnings ratio dropped.

US Stocks are Falling as the Earnings Season Escalates

The S&P 500 Index has come under pressure in the past few weeks as investors have dumped the top companies in the artificial intelligence (AI) industry. 

Nvidia (NASDAQ:NVDA), the biggest company in the index, dropped to $201, down by 17.2% from the year-to-date high. Alphabet (NASDAQ:GOOG) dropped to $278, down by 31% from its all-time high.

Amazon (NASDAQ:AMZN) fell to a low of $229 from the year-to-date high of $287. A closer look shows that most S&P 500 constituents have dropped by double digits from their highest points this year. This includes companies in the technology, retail, financial services, and consumer industries. 

The S&P 500’s retreat has coincided with a relatively strong earnings season. FactSet (NYSE:FDS) data shows that 60% of companies in the index have reported results, with blended earnings growth of 30%, above the 29% analysts expected.

The strong earnings growth has also coincided with the falling valuation, with its forward price-to-earnings ratio being 18.7, well below the five-year average of 19.8. This multiple is also below the ten-year average of 19.1.

The next important catalyst for the S&P 500 Index and its ETFs like VOO, SPY, and IVV will be more earnings from top companies. Some of the top companies to watch will be Apple, Palantir, AMD, Amgen, Arm Holdings, McDonald’s, and ConocoPhillips. 

US Stocks are Falling Amid AI Jitters

The ongoing retreat of the US stock market has coincided with the AI jitters, which escalated this week. Top companies like Intel, Amazon, and Google dropped as concerns about the AI industry continued. Amazon and Google dropped after committing to keep their capital spending and after their earnings showed that core revenue was slowing. 

There have been some notable negative AI news. For example, OpenAI has raised just $11 billion, well short of its $30 billion target. Also, Anthropic’s S1 document showed that it made over $80 billion in losses. Bond yields of top companies like Oracle and CoreWeave have continued soaring. 

The AI Stock Index has jumped to 74, while some top analysts like Ray Dalio and Ken Griffin have warned that the bubble may burst soon. 

S&P 500 Index Has Hit a Crucial Barrier

SPX chart | Source: TradingView

On the charts, the daily chart shows that the SPX Index has hit a crucial resistance level of 7,813. It formed a double-top pattern whose neckline is at 7,507, its lowest swing in September. 

The index has already dropped below the 50-day moving average, a sign that bears remain in control. Therefore, the most likely scenario is where it continues falling, potentially to the 38.2% Fibonacci Retracement level of 7,261, down by 4.2% from the current level.

Image: Shutterstock