A sharp pullback across stocks linked to the AI trade may be masking early signs of a tradable bottom, setting the stage for a potential year-end rally, according to Wall Street strategist Dan Niles.
In a new post on X, the Niles Investment Management founder says that while AI-linked names sold off hard, several internal signals suggest downside pressure could be easing in the near term.
“While on the surface today was a horrible day for the AI names with both the GOOGL & OpenAI complex down 4%, there were some signs of at least a potential short-term bottom. JBL was up 2% on a beat & raise quarter, while MSFT, which owns 27% of OpenAI, was down only 0.1% despite the continuing bludgeoning of OpenAI-related names ORCL and SFTBY, both down 4-5%.”
Niles says a local bottom confirmation could come from Micron Technology (MU).
“If MU, a leading high-bandwidth memory supplier, manages to rally tomorrow in response to spectacular guidance (EPS guided ~76% above consensus and revenues guided ~31% above), this may be at least a short-term tradable bottom for the market into what is normally a seasonally great time to own stocks.”
He adds that any stabilization would align with a historically favorable seasonal window for equities.
“This would be a change following AI bellwethers NVDA and AVGO selling off hard following solid guidance recently. During the Santa Claus rally, which is the last five trading days of the current year plus the two days of the upcoming year, the S&P is typically up over 70% of the time with an average gain of 1.3%.”
Zooming out, Niles says the current phase of the AI cycle is relatively early when viewed against past technology booms.
“From a time perspective, the AI buildout is only in year three versus the internet buildout, which was closer to six years before its ultimate peak.”
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