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Falling Treasury yields, sliding oil prices, and positive SpaceX corporate earnings allowed the S&P 500 to close the trading day in the green after an early decline. Nevertheless, the broad stock index has been stuck in a narrow 7,600-7,800 range since August, with breakout attempts proving to be false breaks. Investors are in no rush to buy, and one can understand why.
High market concentration allowed SpaceX to pull the S&P 500 out of the swamp. In the third quarter, Elon Musk's company revenue jumped by 161% year-over-year to $14.6 billion. Profit came in at $4.4 billion, while capital expenditures surged from $6.9 billion to $19.6 billion. The explosive growth of the latter boosted investor faith that the artificial intelligence boom is not history. It was precisely these fears that dragged down the Philadelphia Semiconductor Index. If AI is fine, interest in chipmakers will return with renewed force.
Philadelphia Semiconductor Index Dynamics
According to Citadel Securities, investors are hesitant to return to tech stocks not only because they have become more selective and demanding. Many are awaiting the results of the US midterm elections. If Democrats take control of Congress, AI legislation could tighten, triggering a sell-off in tech giants and a decline in the Nasdaq 100 and the S&P 500. Investors often draw parallels with the dot-com crisis at the turn of the century: the same euphoria over capital expenditures and profits, the same lack of stock index reaction to Fed monetary tightening. However, if the late 1990s saw loud applause for Internet technology, today, there is much talk that AI risks destroying not only the labor market but all of humanity. At the same time, fundamental stock valuations look quite attractive.
S&P 500 P/E- to-profitability ratio
In such conditions, one can fish in muddy waters. While skeptics talk of an AI bubble, the harm of high Fed rates and Treasury yields for the S&P 500, the Wells Fargo indicator is starting to flash green. This signals an optimal time to buy stocks. When this happened in the past, the broad stock index rose in 89% of cases over the following three months. Average investment efficiency over that period was 6.5%.
Wells Fargo believes investor caution amid slowing profits and negative liquidity is justified, but sentiment has become too bearish.
Technically, the daily S&P chart shows long positions near 7,730 formed from the upper boundary after a failed retest of the inside bar's lower edge. A break above the engulfing bar high at 7,745 would allow adding to those positions.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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