AI doom and gloom is adding to an already volatile mix of market headwinds pressuring stocks this week.
The timing of the latest AI warnings from top executives couldn’t come at a worse time. Investors are also dealing with surging oil prices, a sustained rise in bond yields, and the high likelihood that the Federal Reserve is about to deliver a rate hike at its meeting this week.
Calls to slow AI development from Anthropic CEO Dario Amodei and OpenAI CEO Sam Altman follow last week’s warnings of existential risks posed by the technology. The sudden calls to pump of the brakes after years of companies racing to outdo one another on AI spending marks a stark narrative vibe shift that sent stocks tumbling on Monday.
Chip stocks felt the brunt of the selling pressure. Asian stocks dipped overnight, with South Korean memory chip titans SK Hynix and Samsung dropping 6% and 5%, respectively. The weakness continued into US trading hours.
Here’s where US indexes stood shortly after the 9:30 a.m. ET opening bell:
The jitters began last week, when Anthropic researcher Jacob Coxon went viral after announcing his resignation and warning that AI researchers are “gambling with our lives.” He pointed to fears percolating in the industry that the tech could destroy humanity by the end of the decade.
Other researchers chimed in, leading Anthropic CEO Dario Amodei to call for the industry to slow its pace over the weekend. OpenAI CEO Sam Altman agreed in a following X post, adding that the company’s widely anticipated IPO this year now looked “ill-advised.”
Microsoft appeared to take its own step toward the goal of slowing the frontier on Monday, posting a provisional code of conduct that would set guardrails on the development of future AI models.
Here were some of the biggest moves in the tech sector:
In addition to rising AI fears, markets were already facing a trifecta of headwinds that threaten to derail the bull market heading into the fall.
- Oil prices are spiking again. Crude continued its ascent on Monday amid new fighting in the Middle East and news that Saudi Arabia had shut down a pipeline that bypasses the Strait of Hormuz. Brent crude, the international benchmark, surged another 4% to top $109 a barrel. West Texas Intermediate crude also rose 4% to $104, fanning fears of hotter inflation.
- The bond market is in the grips of a strong sell-off. Yields have spiked in recent weeks as higher energy prices led investors to price in higher rates. Traders have also been dumping Treasurys amid ongoing concern for the US’s fiscal situation. The yield on the benchmark 10-year US Treasury hovered around 4.98% on Monday, within striking distance of the dreaded 5% threshold. A $6 billion buyback of long-dated Treasurys failed to tame the sell-off.
- A Fed rate hike now looks nearly certain. Markets are pricing in a 90% chance the Fed will raise interest rates 25 basis points at their policy meeting this week, up from a 33% probability priced in a month ago, according to the CME FedWatch tool.
Cracks are now beginning to show in the bull market, top economist David Rosenberg said. He pointed to the S&P 500’s 1% loss over the past month, while the Dow and Russell 2000 are trading below their 50-day moving averages, a closely watched technical level that reflects near-term momentum in an asset’s price.
Market breadth, a measure of the number of winning stocks in the market relative to losing stocks, is also “visibly eroding,” Rosenberg added.
“In any event, we have reached a new chapter in this story,” he wrote of the AI trade, pointing to adjacent headwinds like higher bond yields. “Given the acutely high correlations with all S&P 500 sectors to the tech trade, save for Health Care and Consumer Staples, one can reasonably expect the ‘bullish breadth’ narrative to shift into reverse.”
The knee-jerk reaction to AI fears is coming at a time when the tech sector is heavily beaten, analysts at Jefferies wrote in a note on Monday, pointing to how the iShares Semiconductor ETF was down 20% from its recent high. The fund was down 5% Monday morning.
In a note on Monday, Bank of America nudged its year-end target for S&P 500 slightly higher to 7,400, but the revised price target still implies 3% downside from current levels.
“There will likely be a better entry point for S&P 500,” analysts wrote. “The 70s rhymes with today – upside inflation risk, dollar devaluation, Fed hikes, an oil embargo – and its bear market saw a 40%+ decline in stocks and P/Es compress to 8x from 19x.”
All eyes are now on the Fed’s interest rate decision Wednesday afternoon. Investors will be glued in on Fed Chair Kevin Warsh’s remarks after the policy meeting, which could offer markets some insight into how the central bank is feeling about inflation and other macro forces that filtering through to markets.
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