"Foam worries" pervade, warning signals abound, has the AI investment feast in the US stock market come to an end?

On Tuesday, the three major US stock indexes collectively plummeted, with the Nasdaq technology index falling by over 2.5% and the semiconductor index dropping by 4%. Core AI concept stocks NVIDIA Corporation (NVDA.US) and Palantir (PLTR.US) were targeted for short-selling; CEOs of several Wall Street giants publicly warned of a possible market pullback, sparking anxiety among investors and escalating concerns about an AI bubble. Tech giants such as Alphabet (GOOGL.US), Meta Platforms (META.US), and Oracle Corporation (ORCL.US) are issuing a significant amount of debt to fund investments in artificial intelligence, signaling a shift from cash-rich balance sheets to leverage. Meanwhile, as the US government absorbs cash, temporary liquidity tightening is expected to occur, but the subsequent surge in liquidity may boost the market in the short term. In the short term, political tensions for GEO Group Inc threaten the growth of NVIDIA Corporation, while deteriorating market breadth indicates increased downside risks. Concerns about overvaluation Although US stocks still have long-term attractiveness, current valuations, especially in AI and tech stocks, are already high and require caution. The US stock market is currently at high valuation levels; the Mag7 price-to-earnings ratio is currently at 39 times, compared to around 26 times for the S&P 500 index. The technical aspect of the US stock market is also fragile, with the market showing signs of weakness. In the past few trading days, while the S&P 500 index rose, over 330 stocks declined, indicating that only a few stocks supported the overall trend. When the number of leading stocks decreases, the downside resilience increases. Previously, the US stock market's "Titanic signal" (price peak, deteriorating market breadth) has appeared, which is a warning signal for the market. In the 30 previous occasions when this signal was triggered, the S&P 500's probability of a decline in the next two months was 83%, with an average pullback of over 6%. In addition, the famous "Cyclically Adjusted Price-to-Earnings Ratio" (CAPE or Shiller P/E) indicator recently surpassed the 40 mark. This is the second time it has reached such a high level since records began, with the other time being in 1999, during the peak of the tech bubble. Furthermore, the massive AI investment spending is raising concerns about the technology giants' ability to bear it. The concept of being "affordable" is not abstract, it can be measured by cash flow. As long as cash flow can cover investments and debt remains manageable, the company can operate normally. However, when a company's spending exceeds its income, the situation changes, and the issue is no longer just growth but financial sustainability. The net debt-to-equity ratio of Mag7 has decreased from -22% on October 24th to the current -16%. While net debt is still negative, meaning total liquidity is greater than debt, the gap between the two is narrowing, which is not a good sign. It shows that tech companies are spending funds or increasing debt for AI-related capital expenditures. The closer this value is to zero (or becomes positive), the more the system shifts from "cash-rich" to "leveraged." Tech companies are increasingly issuing bonds to finance investments in data centers and AI-related projects. The massive bond issuances have become a hot topic. Especially in recent times, the focus of the tech bond market has been dominated by large transactions: Alphabet will issue $25 billion in bonds to enter the market again, Meta will expand its fund-raising to $30 billion, and Oracle Corporation also issued bonds. The US credit market is undergoing a transformation. The increase in trading volume and the increase in Credit Default Swaps (CDS) for Oracle Corporation are clear signs. Large tech companies that have relied on abundant liquidity for years are returning to debt financing, even in a high-interest rate environment. Even companies with large amounts of cash are issuing bonds at such high rates. On the credit rating front, or more accurately, on the investment-grade bond front, some issues have started to arise. The iShares iBoxx USD Investment Grade Corporate Bond ETF has plummeted in recent trading days, not due to deteriorating credit ratings (as it is not a quality issue) but due to the quantity of bonds. Currently, the ETF is far below its 50-day moving average, indicating that new supply is putting pressure on prices. In total, this accounts for nearly 30% of the total USD bond supply that needs to be digested. In response to this, CEOs of Goldman Sachs Group, Inc. and Morgan Stanley also issued warnings. The CEO of Morgan Stanley, Ted Pick, and the CEO of Goldman Sachs Group, Inc., David Solomon, both stated at a financial summit organized by the Hong Kong Monetary Authority that the current valuation level of the US stock market is concerning, and a significant sell-off may occur in the market in the near future. Goldman Sachs Group, Inc. believes that the stock market may experience a 10% to 20% pullback in the next 12 to 24 months. In this context, the "Big Short" Michael Burry also warned about the AI bubble and his fund shorted NVIDIA Corporation. Michael Burry's Scion Asset Management disclosed bearish positions in NVIDIA Corporation and Palantir Technologies Inc. Only a few days ago, this hedge fund manager issued a cryptic warning to retail investors on social media, implying that market sentiment is overly exuberant. According to regulatory filings, around 80% of the positions in his Scion Asset Management fund are concentrated in short positions on NVIDIA Corporation (NVIDIA, NVDA) and Palantir (PLTR), with a nominal value exceeding $1 billion. It is not clear whether these positions were established separately or as part of an options spread strategy (i.e., buying one option while selling another). Since the 13F filing only requires disclosure of long positions, if Burry used an option strategy, the selling part would not be reflected in the filing. Additionally, any short positions established for hedging or over-the-counter derivative trades would also not appear in the document. Debates on the AI bubble, is the US stock market rally over? Although there are some worrying factors in the US stock market currently, overall, the valuation of the US tech industry is still far below the levels seen during the dot-com bubble period. Furthermore, looking at the financial reports of tech giants, the growth momentum in the AI business remains strong, and profit growth is also rapid. Goldman Sachs Group, Inc. and Morgan Stanley CEOs also stated that the US stock market is "between fair and expensive," and a 10% healthy pullback is inevitable. Morgan Stanley mentioned that a 10% to 15% pullback not driven by some macro cliff effect is welcome; both executives emphasized that pullbacks are a normal feature of market cycles and should be seen as a healthy development. Bank of America also noted that VIX futures and the S&P 500 index have been rising simultaneously in the recent period, a combination of "rising stock prices and increasing volatility," which has historically been a sign of asset bubbles forming, although the expansion process may not be over yet. However, the bank's strategist Benjamin Bowler's team stated that unlike in late-stage bubbles in history, the current VIX index is still near historical median levels, and the realized volatility index is relatively mild, indicating that both the market and volatility itself have further room to rise. Analysis suggests that the main risk in the current market is missing out on the upward trend, rather than a deep pullback. Therefore, Bank of America recommends that investors should not completely exit the market but should participate in the subsequent upward trend through asymmetric tools such as options to control risks and leverage gains. In reality, the US government has accumulated a massive amount of tax and tariff revenue, but due to the longest government shutdown in US history, it has been unable to redistribute this income into the real economy. As a result, the US Treasury's primary account (the so-called "Treasury cash balance") has accumulated around $1 trillion, waiting to be used. Once the US government shutdown ends, public institutions reopen, all this liquidity will be unleashed into the market. For example, agricultural subsidies, food stamps, federal grants, and public contracts will all be released. All this money will be quickly injected into the financial system, like a water balloon, injecting a large amount of liquidity into the market. In other words, once the US government reopens, the Treasury may release up to nearly $1 trillion into the market, resembling an "invisible QE," which can support the stock market and boost the market in the short term. Therefore, US stocks still have long-term attractiveness, but current valuations, especially in AI and tech stocks, are already high and need to be treated with caution. Analysts point out that after the surge in tech stocks, their valuations are high, and a short-term pullback may be seen as a healthy pattern.