US stocks keep showing signs of fatigue after rally

Euphoria over AI is inducing a 'virtuous feedback loop' that’s turning skeptics into equity buyers at higher levels

Wall Street’s rebound failed to gain traction on speculation that a rally that drove stocks to all-time highs is showing signs of exhaustion.

A brief advance on Alibaba Group Holding Ltd.’s artificial-intelligence spending plans failed to prop up the market after the S&P 500 notched almost 30 records this year. It’s been more than five months since the index suffered back-to-back declines of at least 1%.

Bullish investors should keep hedging their portfolios as more and more people chase this year’s stock-market rally, according to Nomura Securities International Inc.’s Charlie McElligott.

Euphoria over AI is inducing a “virtuous feedback loop” that’s turning skeptics into equity buyers at higher levels. This behavior alongside many players at or near maximum exposure has built up downside risk in stocks, he said.

“The trend of strong gains isn’t over yet; however, the short-term risk-reward profile is becoming more compressed as stocks extend higher while underlying momentum fades,” said Craig Johnson at Piper Sandler.

Treasury yields were marginally higher ahead of a $70 billion sale of five-year notes. The dollar rose.

Despite the lack of strength in recent days, the stock market is holding near its record. That’s been underpinned by the belief that the economy is not falling off a cliff and growth will be bolstered by improving corporate profits, the AI boom and rate reductions.

Federal Reserve Chair Jerome Powell’s speech on Tuesday offered no hints on whether he might support a cut in October. Mixed messaging from central bank officials in recent days clouding expectations for monetary policy.

Treasury Secretary Scott Bessent expressed disappointment that Powell hasn’t clearly established an agenda for cutting interest rates.

“Rates are too restrictive, they need to come down,” Bessent told Maria Bartiromo in an interview on Fox Business Wednesday morning. “I’m a bit surprised that the chair hasn’t signaled that we have a destination before the end of the year of at least 100 to 150 basis points.”