Quantitative model triggers callback alert! Is it time for a cooling-off period for the US stock market dominated by the AI computing power frenzy?

Since the US and Iran announced a temporary ceasefire, the historic surge in the US stock market driven by the AI computing power theme has pushed the S&P 500 and Nasdaq 100 indices to continue to set new highs. However, many signs indicate that the market bullish sentiment is overheated, suggesting that this uptrend may be entering a significant slowing and retracement phase. The global stock market bull market surrounding the AI computing power trade seems to have entered a phase of rapid heating up in sentiment and positions. Some Wall Street analysts have even warned that when oil prices fall back, GEO Group Inc eases, corporate profits exceed expectations, and concerns about Fed tightening fade, the market often easily enters a trajectory of "good news already over-reflected" downward adjustment or even bear market rebound. There is no doubt that the US stock market is still in the AI profit upgrade cycle, but in the short term, there are signs of overheating and retracement conditions. The surge in the AI computing power industry leaders is supported by strong profitability: AMD's strong performance has led chip stocks collectively higher, AI data center CPUs, AI GPUs/AI ASICs, HBM, DRAM/NAND storage, optical interconnections, advanced packaging, power and cooling chains are all being repriced; US-based storage chip leader Micron (MU.US) has added over $100 billion in market value in three days, with the core logic still focused on the fundamentals - such as locked HBM inventory and tight storage supply and demand, indicating that this is not simply a bubble crowded market talking grand stories. However, if market breadth does not expand to non-tech sectors, once the Philadelphia Semiconductor Index indicator of the global semiconductor stocks and the "AI computing power investment indicator" falls back to the 50-day moving average, a 25%-30% industry-level downward correction is not an exaggeration; but this is more likely a "deleveraging cooling" in the bull market trajectory driven by AI investment frenzy, rather than the fundamental collapse bubble burst bear market seen in 2000-2002. Quantitative models warn that "frenzied trading" is approaching a critical point, and the shadow of a retracement is looming The historic rebound since the March low, driven mainly by the significant easing of the geopolitical tension in the Middle East GEO Group Inc and the sharp increase in corporate profits, has pushed investor sentiment into a "frenzy" region as shown by a quantitative model compiled by Bloomberg Intelligence strategists. The model tracks six core components, three of which are driving it close to this frenzy benchmark level: high-yield corporate bond spreads, low volatility, and pairwise correlation. This does not necessarily mean that a crash or a bubble burst is imminent: this backdrop usually coincides with further gains, but with more moderate gains, and after the moderate gains, there tends to be a period of adjustment. According to the Market Pulse model compiled by Bloomberg Intelligence, in the period from 2012 to 2023, within three months after several historically rare high corporate market sentiment readings, the average return on the Russell 3000 Index was 2.9%. During these periods, the large-cap stocks tended to perform better, with the S&P 500 Index outperforming the small-cap Russell 2000 Index by about 178 basis points. However, the overall trend of this round of the US stock market and even the global stock market's strong bull market rally is different from previous surges. Historically, such large monthly increases have often occurred after deep market retracements, such as in April 2009 and April 2020, when global stock markets accelerated rebound from historic lows driven by liquidity crises. This time, stocks have continued to rise from already historic highs to all-time highs, which may limit future upside potential. Christopher Cain and Nathaniel Welnhofer, senior analysts at Bloomberg Intelligence, wrote in a report, "When everything works - growth stocks significantly outperform value stocks, cyclical stocks significantly outperform defensive stocks - this is usually an important signal of the late stage, and not a new starting point." "History shows that returns may still be positive, but attractiveness of returns decreases, and market leadership will significantly narrow back to the large-cap stocks." The S&P 500 Index recorded a monthly gain of over 10% in April, its fifth-best monthly gain performance in the past 35 years, pushing the benchmark index to refresh its all-time high. In less than a week into May, the index has already risen by 2.2%. At 7:32 AM New York time, S&P 500 index futures rose 0.1%. Although rising energy prices have cast a shadow over the remainder of the year, this surge is not without fundamental support. The overall earnings of S&P 500 index component stocks are expected to increase by nearly 27% from the same period last year in the first quarter, far exceeding the 12.4% forecast made before the earnings season. As of Wednesday's market close, Bloomberg Intelligence's statistics show that over 83% of the S&P 500 component companies have exceeded expectations, marking the strongest performance since 2021, and the rate of negative surprises (those that fall short of expectations) is at its lowest level in over thirty years. From an earnings standpoint, the US stock market is still in an AI profit upgrade cycle, but in the short term, there are signs of overheating and retracement conditions, indicating that this trend is more likely a "deleveraging cooling" in the AI bull market, rather than the fundamental collapse bubble burst bear market seen in 2000-2002. Analysts at BTIG warn in a research report that the level of euphoria in chip leaders and other tech stocks is "more extreme" than in 1999, and may lead to a significant pullback in the semiconductor index, pushing the index back to its 50-day moving average. BTIG said that if more non-tech sectors also start to rise, and market breadth expands, then even if tech stocks that have driven the US stock rebound fall back, it can alleviate the impact on index ETF positions and investor asset allocation portfolios. Joe Gilbert, portfolio manager at Integrity Asset Management, said, "We have indeed shifted from extreme pessimism to a somewhat overly optimistic sentiment." "What is worrisome is the sustainability of this uptrend. Therefore, the more narrowing market breadth currently indicates that in each round of gains, market participation is becoming less full." The most concerning aspect at present is that the intensity of the uptrend and the market concentration have approached or even exceeded certain extremes of the dot-com bubble period. From the perspective of growth driven by fundamentals, the US stock market is still in the AI profit upgrade cycle, but in the short term, it has conditions for stage overheating and retracement, but this trend is more likely a "deleveraging cooling" in the AI bull market, rather than the fundamental collapse bear market seen in 2000-2002. Jonathan Krinsky, senior strategist at BTIG, points out that if the uptrend continues to be highly dependent on chips and tech stocks, once they "return to Earth," the index will be more fragile. BTIG said that in the past year, the top 10 stocks in the Nasdaq 100 index have average gains as high as 784%, exceeding the 559% seen in 1999, and exceeding the level in the year before the peak in March 2000. "If the market rise is no longer only reliant on a few tech giants, but spreads to more sectors like finance, industry, healthcare, and consumer areas, then when tech stocks fall from highs, other sectors can provide a buffer, reducing the downward pressure on the S&P 500 or Nasdaq," the strategist said. Senior strategists at MarketWatch also said that AI chips, storage chips, and data center semiconductor segments have become the absolute mainline of the market, with staggering gains in companies like SanDisk, Micron, AMD, Intel Corporation, and the fundamental logic is indeed more solid than the frenzy of price increase curve seen in 1999, but the price momentum has already priced in the "Perfect World" scenario, and there is a high probability of short-term downward adjustment.