US stock euphoria on AI deal spree dented by ISM data

The S&P 500 fared better, rising 0.3%, setting the US benchmark on track for a sixth straight gain and its longest winning streak since July

US stocks touched record highs as Friday brought another round of big-ticket artificial intelligence deals and partnerships before a reading on business activity chipped away at the gains.

The Nasdaq 100 struggled to hold onto an early climb to an all-time high after a readout from the Institute for Supply Management weighed on the rally. It showed the US service sector stalled in September as business activity shrank for the first time since the pandemic and orders barely expanded.

The S&P 500 fared better, rising 0.3%, setting the US benchmark on track for a sixth straight gain and its longest winning streak since July. The gauge has now gone 114 trading sessions without a 5% pullback, taking investors on a one-way march higher.

Global Infrastructure Partners’ advanced talks to acquire Aligned Data Centers, a major beneficiary of the AI spending boom helped stoke fresh optimism. The deal could value the company at about $40 billion. In Asia, Japan’s Hitachi Ltd. teamed up with OpenAI on energy and related infrastructure, while Fujitsu Ltd. expanded its collaboration with Nvidia Corp.

“While it’s been very difficult to stand in front of this market, storm clouds are darkening, including the late-‘90s-like trends unfolding in tech/AI, a disconnect between Fed rhetoric and market expectations around easing,” writes Vital Knowledge’s Adam Crisafulli. Bears see investors as “very complacent about the shutdown, with most assuming it will be wrapped up in under two weeks, but there doesn’t seem to be substantive movement toward a compromise.”

Among signs that the market is getting frothy: a sentiment gauge compiled by Barclays Plc has been sitting near a level that indicates exuberance. A similar Bloomberg Intelligence measure is back to a “manic” zone that’s preceded lukewarm returns in the past.

While investors are wagering that the billions pouring into the AI sector will translate into profits and extend gains in tech shares benchmarks are also bumping up against technical levels that often signal a decline is imminent.

Friday’s burst of new partnerships and potential deals came just a day after a share sale lifted OpenAI’s valuation to $500 billion. Stocks have climbed to successive record highs this year, with AI optimism adding to bullish momentum from prospects of monetary policy easing and resilient earnings.

Federal Reserve Bank of Chicago President Austan Goolsbee reiterated his view that officials should proceed carefully with interest-rate cuts on Friday.

The benchmark 10-year which helps set a range of borrowing costs in the US rose nearly 3 basis points to 4.11%. Fed officials disagree about how much further to reduce borrowing costs after lowering their benchmark rate by a quarter percentage point last month. The temporary blackout in readouts during the US government shutdown threatens to further obscure the Fed’s next move, but swaps traders remain confident in another quarter-point cut in October.

In commodities, gold was on track for a seventh weekly gain, fueled by central bank buying amid falling US interest rates and lingering inflation concerns. And despite all the hype around AI and the surge in chip stocks this year, gold miners have actually been the better bet.

In other corners of the market, oil headed for its biggest weekly decline since late June, ahead of an OPEC+ meeting that’s expected to result in the return of more idled barrels.

The continued optimism around AI is stoking questions over how far the rally can run. Concerns are growing that valuations look overheated as spending has yet to translate into earnings.

“The market may well start asking questions whether current valuation levels are justified,” said Wolf von Rotberg, equity strategist at Bank J. Safra Sarasin. “Further upside is set to be much more gradual, with risks of a setback fairly elevated.”