Market Insights

AI stocks could be showing signs of fatigue as the end of the second quarter approaches.

The S&P 500 rose 0.6 percent in the holiday-shortened week between Friday, June 14, and Friday, June 21. It was the third consecutive positive week, with more than 70 percent of the index advancing. However, large technology companies that led the recent surge declined.

Nvidia (NVDA) was the key chart. The semiconductor company briefly surpassed Microsoft (MSFT) as the world’s most valuable company. It entered the week up 166 percent on the year, powered by strong earnings and its stock split on June 10. Prices briefly topped $140 (split-adjusted) on Thursday, before dropping under $130. That bearish “outside day” is a potential reversal pattern, similar to the move on March 8 that was followed by two months of sideways movement.

Other stocks that recently gained on AI enthusiasm, like Apple (AAPL) and Broadcom (AVGO), also declined.

Economic data was mostly negative. Retail sales missed estimates and jobless claims continued to show a weaker job market. Housing numbers like starts and building permits were worse than expected. Other numbers like May’s industrial production and S&P Global’s Composite PMI were more positive, reflecting a potential non-consumer rebound.

Positive news on interest rates continued.

“Inflation remains too high, but I am encouraged by the overall progress and trajectory,” Federal Reserve governor Adriana Kugler said in a Tuesday speech. “There are signs of gradual cooling and continued wage moderation.” She added that if the trends continue “it will likely become appropriate to begin easing policy sometime later this year.”

The U.S. Treasury Department also enjoyed healthy demand for 20-year bonds. That matched strong auctions the previous week, adding to potential hopes that interest rates will decline.

Energy Bounces

Energy was the leading sector last week, according to TradeStation data. It bounced along with crude-oil prices after tensions between Israel and Lebanon spurred worries of broader conflict in the Middle East.

Consumer discretionaries and financials also gained.

Solar-energy stocks, homebuilders and chipmakers were the worst performers.

Some of the big gainers included Gilead Sciences (GILD) and Accenture (ACN).

GILD rallied on positive data associated with its potential HIV treatment known as lenacapavir. ACN jumped after issuing results. While earnings and revenue missed estimates, the IT company had fallen sharply before the report. Management also highlighted new orders related the AI.

Enphase Energy (ENPH) was the biggest decliner in the S&P 500. The drop was partially triggered by JPMorgan citing weak European demand for solar-energy products.

Bullish Sentiment

Last week’s news suggested bullishness is getting more commonplace. Citi and Goldman Sachs separately raised their price targets on the S&P 500 to 5,600. Both cited strong earnings, especially by megacap technology companies like NVDA. Evercore ISI also lifted its projection to 6,000.

However, BofA warned that fund managers have the most bullish positioning (based on stock and cash balances) since November 2021. Another survey from the American Association of Individual Investors showed just 22.5 percent of investors think stocks will be lower in the next six months. That’s the lowest since early April — the same time the S&P 500 started a pullback.

Those points are potentially contrary indicators suggesting that “good news is priced in.”

Charting the Market

While stocks have steadily trended higher, chart watchers may notice at least two signals for a potential pause.

First, the S&P 500 formed a bearish “outside day” similar to NVDA on June 20. Traders may look for selling pressure to increase if the index closes below its low of 5,505 that session.

Second, Wilder’s Relative Strength Index (RSI) is dipping from an overbought condition.

If prices break lower, traders may view the June 13 low of 5,402 as support.

Some investors may also notice that Cboe’s volatility index (VIX) has remained around 13. Moves higher could be associated with weakness in stocks.

Finally, the calendar is relatively quiet through the end of the quarter and July 4 holiday.

The Week Ahead

Speaking of the calendar, this week brings a handful of events that are relatively unimportant.

Fed governor Christopher Waller and San Francisco Fed President Mary Daly speak today.

Tomorrow brings earnings from Carnival (CCL) and FedEx (FDX). Lisa Cook and Michelle Bowman, both Fed governors, make public comments as well.

New home sales, crude-oil inventories and Micron Technology (MU) earnings are on Wednesday.

Thursday features initial jobless claims, durable-goods orders and pending home sales. Walgreen Boots Alliance (WBA) and Nike (NKE) issue results.

Friday, the last day of the second quarter, brings the personal consumptions expenditures (PCE) price index. While it’s a closely watched inflation report, its impact could be muted by lower-than-expected consumer and producer price indexes (CPI and PPI) earlier in the month. Richmond Fed President Thomas Barkin also speaks.