By Mike Santoli
"We’ll never laugh again," said a young admirer of John F. Kennedy in 1963 as she mourned his sudden death.
"We’ll laugh again," answered the JFK aide Daniel Patrick Moynihan. "It’s just that we’ll never be young again."
At the risk of seeming to conflate a presidential assassination with an investment motif, this historic sentiment captures precisely where the artificial intelligence theme sits right now in the financial markets. There will undoubtedly be plenty of cheer, thrilling breakthroughs, and substantial profits generated by this burgeoning technology in the years to come. However, the youthful phase of AI—that carefree period when the promise felt truly unlimited, winners were exceedingly easy to spot, and potential beneficiaries vastly outnumbered any losers—is officially over.
This evolving market reality predates the recent litany of ominous pronouncements regarding the destructive potential of advanced AI models and the tech industry’s increasingly professed desire for some form of restraint on the velocity of development. Semiconductor shares were already trading roughly 20% below their June highs prior to a subsequent 4% single-day slide. Meanwhile, the technology sector within the S&P 500 has watched its forward price-to-earnings multiple contract significantly, dropping from 29 to 21 over the past year. The broader market has grown increasingly unwilling to blindly extrapolate astronomical profit surges in the immediate absence of a clear, undeniable path back to reaping massive amounts of free cash flow.
Data centers, the physical backbone of the AI revolution, currently find themselves suffering from a lower public approval rating than the United States Congress—to the point where it is hard not to assume that the overheated public ire will eventually burn itself out following the political cycles. Perhaps very little will change in terms of overarching government AI policy, intensive model training regimens, or the insatiable demand for computing capacity. Yet, in financial markets, narratives matter quite a bit in the near term.
For the moment, the dominant AI narrative has shifted its primary focus away from expansive opportunities and onto mounting risks. Rightly or wrongly, the breathless public talk of throttling the physical buildout makes it marginally tougher to argue that forward earnings projections—which remain enormously dependent on semiconductors—are currently set too low. Furthermore, anyone who was already worried that the scorching profit growth witnessed during the second quarter represented a classic case of pulled-forward demand and temporary margin expansion will find only their existing biases confirmed by recent price action.
Artificial intelligence has grown increasingly unpopular with the public eye, projections regarding order backlogs extending beyond a few quarters are now treated with healthy suspicion, and investors may finally be dialing back their aggressive assessments of how quickly an entire class of entrenched, traditional businesses will be displaced by the automated hive mind.
Yet, there are distinct positives embedded within this transition. If a year ago the single most-cited concern across Wall Street was that a dangerous AI bubble was forming and that speculative exuberance was frothing over beyond reasonable bounds, that particular risk has largely been addressed. The savage market purge of high-momentum stocks since June—which has been heavily dominated by AI hardware suppliers and related industrial firms—has successfully sapped the relentless bullish aggression of everyday traders, helping to reset tactical market sentiment toward a much healthier, more neutral level.
Monday’s perky market action in shares of the massive technology platforms that are funding the lion’s share of AI capital expenditures—including Microsoft, Alphabet, and Meta—reveals a hidden silver lining from a potential industry slowdown. It allows these dominant mega-cap companies to take a strategic breath before accelerating their capital raising and deployment further still down the road.
The broader market has already demonstrated a voracious appetite for companies that can consistently demonstrate copious free cash flows at a time when such financial flexibility has become increasingly scarce. Consider the performance of the VictoryShares Free Cash Flow ETF, which quietly tracked the “Magnificent Seven”-dominated S&P 500 for two years before leaving it decisively in the dust over the past few months. This particular exchange-traded fund is heavily packed with software, healthcare, and energy stocks that appear fundamentally cheap, at least cosmetically, when evaluated through the lens of free cash flow yield metrics.
Any dialing-down of unbridled "AI maximalist" speculative fervor also prevents the current market cycle from building up structural excesses that would merit a straight, unvarnished comparison with the runaway exuberance witnessed at the very tail end of the 1970s or the 1990s tech boom.
This distinction is crucial, because from a broader macroeconomic perspective, the historical echoes of 1999 continue to reverberate faintly in the background. Consider the striking parallels: The Federal Reserve has found itself poised to begin lifting interest rates as the benchmark 10-year Treasury yield tops a boldfaced threshold around 5%, and a massive tech-capex boom threatens to overheat distinct parts of the broader economy. This mirrors the environment of June 1999, when the central bank began hiking interest rates as 10-year Treasurys surged toward a key round number of 6% while a similar tech-capex boom raged. In both instances, the Fed had previously cut rates three times late in the prior year to successfully counter an economic growth scare as inflationary pressures ebbed.
Back then, the Federal Reserve would go on to hike benchmark rates by a full percentage point into early 2000, a period when Fed Chair Alan Greenspan famously testified that he was continuously surprised the broader economy hadn’t slowed down much. He would ultimately jack rates up by another 75 basis points just as stock prices peaked, paving the way for a lost decade for equities and sliding the national economy toward a painful recession.
While most market observers prefer to avoid suggesting that the current cycle will hew too closely to that historical precedent—largely doubting that modern speculative exuberance will carry quite so far in the exact same manner—that does not mean a "lower extreme" will be entirely avoided during this cycle ahead of a natural payback phase.
Many market observers invoke the legendary patterns of the 1990s to suggest that we are still in the relatively early innings of the secular AI bull trend. The Bespoke Investment Group, for instance, has plotted the performance of the Nasdaq Composite index since the public release of ChatGPT against the trajectory of the index following the commercial introduction of Netscape in 1994. The historical tracking has aligned surprisingly well, whether by pure coincidence or underlying structural similarity. However, some analysts have long argued that comparison is far too forgiving, given that the technology sector was already ascendant in a way it simply wasn’t back in 1994, and market enthusiasm for artificial intelligence kicked in instantaneously rather than experiencing the slower, more deliberate boil seen after Netscape’s initial public offering in 1995.
Evercore ISI strategist Julian Emanuel has gone so far as to cast the June 2026 initial public offering of SpaceX as being more akin to the landmark Netscape IPO rather than serving as the ultimate culmination of AI enthusiasm that conveniently coincided with a severe technology hangover.
These historical comparisons underscore the universal human desire to claim that our current market cycle is younger and more resilient than it truly appears—though wishing does not necessarily make it so.
One prominent bullish argument frequently cited regarding the stock market’s ultimate ability to comfortably shake off 5% 10-year Treasury yields is that the massive 1999 bubble ramp actually occurred precisely while prevailing yields hovered between 5% and 6%. While this factual observation is entirely accurate, it is not a direct one-for-one match. Yields during the late 1990s were actually trending downward from peaks of 7% to 8% five years prior, rather than marching aggressively upward from a generational low of 1% over the past five years. Furthermore, the 1999 market bubble also developed against a backdrop where corporate tax rates stood at a hefty 35%, compared to just 21% today, and with traditional retail brokerage firms routinely charging steep $15 commissions per individual trade.
One must wonder if today’s hyper-active digital market would manage to completely avoid a significant hiccup if it were forced to rapidly revert to those underlying macroeconomic conditions.
Market Temperature Gauge
This technical indicator, compiled by John Kolovos of Macro Risk Advisors, utilizes several distinct quantitative data points to accurately reflect both what market investors are verbally saying and how they are actually behaving with their capital.
"Bullish sentiment is moderating but has yet to reach contrarian extremes, despite the persistent underperformance of beta, last week’s spike in the VIX, and the growing number of stocks breaking below their 50-day moving averages," Kolovos noted in a recent assessment.
Market on Close
The S&P 500’s months-long sideways market churn reflects a trading tape that continues to valiantly rescue itself through alacritous internal sector rotation. A recent trading session saw roughly 10% of the S&P 500 constituent companies fall by 4% or more, while another 10% of the index climbed by at least 4%, ultimately netting out to a modest headline decline of 0.5%.
The S&P 500 index has essentially gone nowhere since June 1, yet it has remarkably managed not to slip by more than 3% from any record high over that entire multi-month span. In fact, it has spent nearly the entirety of the time since August 4 trapped safely inside the wide price range established by a single day’s massive rally to a record high.
Overall market breadth has undeniably eroded over the period, but that internal deterioration also means that persistent oversold conditions are steadily building beneath the surface. Seasonal tendencies remain notoriously challenging, a reality that virtually every professional market participant acknowledges. Institutional positioning has successfully moderated by nearly all traditional measures.
Yet, one primary explanation for the way the broader market continually rotates capital from pocket to pocket rather than making decisive, outright progress upward is the fully committed investment positioning of the household retail investing sector.
Bank of America routinely plots the asset allocation of its wealthy private banking clients on a weekly basis, and current equity exposures sit proudly at quarter-century highs. Conversely, traditional bond and cash holdings are scraping historical lows.
Much of this heavy equity concentration is merely a natural byproduct of multi-year stock market appreciation, though individual investors are actively allowing their equity exposures to climb higher without engaging in routine portfolio rebalancing. This creates a somewhat ironic dynamic and a clear cause for institutional pause, given that, for the first time in many years, fixed-income bonds are finally providing a legitimate, attractive yield cushion to any investor willing to take it.
