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The AI Rally's Just Borrowing Time

Tech stocks are wobbling, and the Nasdaq futures are feeling the heat. After a strong run, the S&P 500 took a 1.2% hit, and the Nasdaq Composite dropped a steeper 2%. The Dow Jones Industrial Average wasn't spared either, shedding 251 points, or 0.5%. The question now isn't whether the market will correct, but when and how severely. Nasdaq futures lower after losing session: Live updates

Palantir's Plunge: A Canary in the AI Coal Mine?

Palantir's recent performance is particularly telling. Despite exceeding Q3 expectations, the stock nosedived about 8%. The reason? Valuation concerns. Trading at over 200 times forward earnings, Palantir embodies the stretched valuations plaguing the AI sector. It's like watching a high-wire act—impressive, but with a stomach-churning drop if things go wrong. Investors are starting to wonder if the AI narrative has become detached from reality.

Liz Young Thomas from SoFi remains optimistic, suggesting that the "large cap love affair" will persist. But, let's be real, optimism isn't a strategy. It's more of a feeling. The real question is: can these valuations be justified by actual earnings growth, or are we just riding a wave of hype? The numbers need to back up the enthusiasm, and right now, that connection feels tenuous.

And this is the part of the report that I find genuinely puzzling. We're seeing this massive enthusiasm for AI infrastructure spending, but where's the corresponding explosion in profits attributable directly to those investments? It's like everyone's building the roads for a gold rush, but no one's found the gold yet.

Data-Driven Delusions and the Search for Clarity

Investors are now turning to alternative data sources—a move that speaks volumes about the perceived reliability of official government reports. Wednesday brings the ADP private payrolls report, weekly mortgage applications, and ISM services data. Every data point will be scrutinized, dissected, and over-interpreted. That’s the market’s nature.

Earnings season continues, with McDonald's set to report. So far, roughly 82% of S&P 500 companies have beaten expectations, contributing to a blended growth rate exceeding 12%. But here's the catch: "beating expectations" doesn't always equal stellar performance. Expectations can be carefully managed (read: lowered) to create the illusion of success. It’s like a magician's trick – impressive on the surface, but less so when you know how it's done.

The S&P 500 is set to post a blended growth rate of more than 12%. Growth was about 12%—to be more exact, let's say, 12.3%.

The Illusion of Growth and the Inevitable Correction

The market's current state reminds me of a coiled spring. It's been stretched and stretched, and the longer it's held, the more violent the release will be. The over-reliance on a few megacap tech stocks is particularly worrying. If those giants stumble, they'll drag everyone else down with them.

I have looked at hundreds of these filings, and this particular footnote is unusual. The footnote states that the reported growth is largely attributable to accounting adjustments related to deferred tax assets. (Deferred tax assets, in this context, are essentially paper gains.)

The Party's Almost Over