Tom Essaye, founder of Sevens Report, has raised concerns about a potential stock market bubble, driven largely by the artificial intelligence (AI) trade.
What Happened: Essaye voiced his apprehensions regarding the health of the AI trade. Despite the S&P 500 nearing all-time highs following a 28% rally since April, and a 57% gain since the announcement of ChatGPT in November 2022, the SOX index remains below its July 2024 highs.
The PHLX Semiconductor Index (SOX), Essaye suggests, is a key indicator of this looming threat, reports the Insider.
According to Essaye, this divergence in performance could signal an unhealthy market rally, largely fueled by the AI narrative.
He warned that if the SOX index starts to decline significantly, the S&P 500 is likely to follow suit. “Comparing the index’s performance to the S&P 500 over the last couple of years shows this bull market in equities has a serious problem,” he said.
Further signs of a potential bubble include a weakening US economic outlook and poor job gains over the last few months, raising fears of a recession.
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Essaye emphasized the importance of closely monitoring economic data, as the S&P 500’s rapid ~85% rally since October 2022 leaves the equity market vulnerable to significant downside, pending economic resilience.
The warning from Essaye comes at a time when the stock market has been on a tear, largely driven by the AI trade. The SOX index, which tracks semiconductor stocks, is a key barometer of the health of the AI trade.
A significant decline in the SOX index could potentially signal a broader market downturn. This, coupled with a weakening US economic outlook and poor job gains, raises fears of a recession.
Investors and market watchers would do well to heed Essaye’s advice and closely monitor economic data.
The rapid rally of the S&P 500 since October 2022 leaves the equity market vulnerable to significant downside, pending economic resilience.
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