S&P 500 eyes longest losing run since August on AI, crypto fears

The S&P 500 was set for its longest losing streak since August, as a six-month rally shows signs of cracking following a $1.2 trillion selloff in cryptocurrencies and fears around high artificial intelligence valuations.

Futures tracking the S&P 500 were down 0.3% at 5:36 a.m. in New York after earlier dropping as much as 0.8%, signalling some support from dip buyers. The benchmark is still on course for a fourth day of declines as investors reconsider their optimistic expectations for Federal Reserve interest-rate cuts.

Technology-heavy Nasdaq 100 futures also slipped 0.3%. Asian and European stock indexes fell, while Bitcoin briefly dropped below $90,000 for the first time in seven months. Meanwhile, a Bank of America Corp. survey showed that fund managers’ cash holdings have fallen to low levels that have triggered a sell signal in the past.

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"Appetite for AI is under pressure from circularity worries and bubble fears,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. “The bad news is that some of the more bullish vibes — AI enthusiasm, massive government stimulus, dovish central-bank expectations — are starting to fade."

US stocks have come under pressure this month as investors worry the AI-led rally has run too hot. The S&P 500 is trading at about 22 times forward earnings, above its 10-year average of 19. Concerns are also rising about the economic impact of the longest US government shutdown.

Cryptocurrencies have slumped, with many smaller coins nursing losses in excess of 50% for this year. Digital tokens have lost a combined $1.2 trillion of market value since Bitcoin peaked in October, figures from CoinGecko show.

Investors have so far been keen to buy the dip, given underlying optimism about US economic growth. On Friday, the S&P 500 reversed losses of as much as 1.4% to end the day little changed, and a similar swing looked possible on Tuesday too, as futures rebounded off their session lows.

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“We tend to treat market retrenchments as a buying opportunity,” said Marija Veitmane, head of equity research at State Street Global Markets. “The economy is strong enough to support robust earnings growth and yet weak enough to warrant rate cuts."

Still, there’s a higher demand for bearish bets on technology stocks, suggesting faltering confidence in a sustainable rally. Heavy spending on AI is also raising worries about companies’ capacity to finance such bills. Credit spreads for Oracle Corp. have soared to the highest in nearly three years.

Fund managers’ average cash holdings have fallen to 3.7%, something that has only occurred 20 times since 2002. Stocks fell and Treasuries outperformed in the following one to three months each time it happened, BofA strategists said in a note. The survey also showed that for the first time in 20 years, investors said companies are overinvesting.

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The S&P 500 is now about 3% below its October peak, and on Monday, it closed below its 50-day moving average for the first time since April. Market breadth has also weakened, with only 54% of S&P 500 constituents trading above their 200-day moving average, according to data compiled by Bloomberg.

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All eyes are now on AI bellwether Nvidia Corp's quarterly earnings report due Wednesday. Meanwhile, swaps traders have pared bets on the possibility of a Fed rate cut in December.

For Matt Britzman, senior equity analyst at Hargreaves Lansdown, the longer-term outlook for stocks remains intact. "Pullbacks are never fun but are often healthy, especially in a market that’s showing signs of frothiness," he said.