Has the Worst of the AI Bull Market Passed? Wall Street Says the Real Test Is Just Beginning

Wall Street has just gone through its worst stretch in months. Tech stocks led the decline, bond yields soared, oil prices fluctuated violently—a convergence of multiple pressures has plunged investors into deep anxiety: has the market’s darkest moment passed yet?

In July, the Nasdaq Composite Index fell 3.2%, marking its worst monthly performance since March this year; the S&P 500 Index dropped a slight 0.1%, with only the Dow Jones Industrial Average edging up 0.3% for the month.

Meanwhile, although the technical rebound in the last two days of the month provided temporary relief, Goldman Sachs’ top derivatives trader Brian Garrett warned that last week’s buying was largely a “gross down” of short covering, not genuine long buildup—a key distinction that suggests the market's stabilization is still on shaky ground.

Inflation’s return, an uncertain interest rate outlook, and doubts regarding the sustainability of AI capital expenditures make up the triple bind suppressing tech stocks. Garrett clearly pointed out that this week’s nonfarm payroll data and interest rate trends will be critical litmus tests for whether the earlier rebound signaled a true return of demand or was merely a bout of position unwinding.

Callie Cox, chief market strategist at Ritholtz Wealth Management, believes that investors must be prepared for more market volatility—inflation has once again become the dominant force driving the broad market.

“I’m not saying a (decline) is certain to happen, but the current environment is complex enough and we’re facing too many elevated indicators. Even if the market does turn up, the path to recovery is unlikely to be smooth,” Cox told MarketWatch. “Right now, inflation is the biggest risk faced by equity portfolios, and at the same time, economic growth lacks resilience heading into year-end.”

Recent data shows that, at least as of June, inflation showed signs of cooling. The latest Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) both declined. But the rise in oil prices in July threatens to reverse this progress. Cox pointed out that the current drivers of inflation are fundamentally different from the price crisis of 2022, which was triggered by supply chain disruptions and massive fiscal stimulus. However, after nearly four years of a strong bull market, uncertainty over interest rates and inflation pressures are now high enough to continuously disturb stock prices.

The inflationary threat is not just coming from energy prices—the AI investment boom is itself creating fresh cost pressures. Brian Kersmanc, portfolio manager at GQG Partners, noted that key inputs consumed massively by data centers and AI infrastructure, such as memory chips, are seeing persistent price increases. Companies may eventually pass these costs on to customers, further fueling inflation.

“Inflation is largely driven by sentiment,” said Kersmanc:

“If people believe inflation is coming, they will spend and act accordingly. So the longer inflation lasts, the easier it is for it to reinforce itself.”

For rate-sensitive sectors with extremely high valuations—particularly chip stocks—this logic is especially dangerous. Much of these companies’ expected revenue and profits stem from the distant future; when discount rates rise due to high interest rates, the present value of those future cash flows can shrink dramatically.

However, Kersmanc also pointed to a reverse positive effect: high interest rates not only compress valuations, but also dampen both the willingness and ability of companies to pursue capital expenditures. “From this perspective, inflation might actually benefit hyperscale cloud providers, because what the market currently fears most is their overly aggressive capital spending,” he said.

Goldman Sachs data supports this divergent logic: last week’s earnings season for large-cap tech stocks showed extremely varying market reactions—Apple’s market cap evaporated by about $50 billion in a single day, Meta plunged nearly 8%, while Amazon and Microsoft both soared more than 15%. Microsoft set a new all-time record for the largest single-day increase in market cap (around $550 billion).

July’s overall market malaise masked deep structural rotations within.

According to FactSet data, the S&P 500 equal-weight index, which eliminates the impact of market cap weighting, actually rose 1.3% in July, while the market cap-weighted S&P 500 fell 0.1% during the same period. Of the S&P 500’s 11 sectors, seven posted positive returns in July—only information technology, industrials, materials, and utilities ended the month lower.

Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors, attributes this phenomenon to the ongoing shadow of geopolitics: “Under the weight of war, the market can only rotate.” He also cautioned that hedge funds may not have finished deleveraging, and further forced selling could generate continued volatility.

Goldman Sachs data provides further evidence: last week, tech stock long liquidation reached the largest three-day size in Goldman’s records on Tuesday, only to show signs of re-accumulation on Friday—the shift from historic selling to tentative recovery within the same week illustrates the extreme difficulty of the current environment.

Even though the market saw a clear rebound at the end of last week, Goldman’s Brian Garrett explicitly advised caution. He noted that last week's net buy volume was the largest since November 2020, but the primary driver was short covering, not aggressive long additions—the ratio in the derivatives market was about 2:1. This means the rebound resembled a technical recovery after position clearing, rather than a trend driven by new buying interest.

Structurally, the S&P 500 had closed below its 50-day moving average for six consecutive sessions; CTA strategies in the US remain slightly negative in terms of trend signals, with key support levels at 7,445 and 7,215. Meanwhile, the global leveraged ETF asset base has plummeted by about $60 billion (about 28%) since June, with net actual exposure shrinking an even more dramatic $170 billion—this massive forced de-leveraging still poses a latent risk to market structure.

Garrett currently favors positioning under the assumption that the systemic de-leveraging cycle is nearing an end: strategies like going long on volatility declines and buying three-month S&P 500 call options to bet on a “slow grind higher” scenario. But he also emphasized that this week’s nonfarm payroll data, and whether interest rates and corporate earnings can “validate” Friday’s rebound, is the real test for whether this judgment holds.