AI bubble unwind and Middle East tensions compound US stock market risks

The unwinding of an AI bubble is compounding pressure on US stocks already weakened by Middle East tensions and deteriorating market breadth, investment expert Peter Grandich said. A shrinking group of large companies has supported the index while many constituents have fallen sharply, with potential political gridlock after the midterm elections adding to the risks.

In an October 25 interview with David Lin, Grandich argued that fading enthusiasm for AI was as significant to the market decline as the Middle East conflict. He described technology stock weakness, geopolitical tensions and election uncertainty as overlapping pressures on equities.

Grandich said the market's underlying weakness had become apparent during the summer. Fewer stocks were supporting the S&P 500 as the broader market moved sideways or lower, while new lows outnumbered new highs. An increasing number of constituents had fallen 10%, 20%, 30% or even 40% or more from their peaks, he said, explaining why he had favored bearish positioning from September.

He argued that enthusiasm for AI had rested on expectations that its benefits would extend across a wide range of companies. Investors were beginning to question that assumption, he said, suggesting the episode could eventually be regarded as the largest bubble in Wall Street history.

The Middle East conflict was also putting pressure on markets through oil prices and business costs, Grandich said. Although conflicting reports made conditions difficult to assess, he argued that businesses were passing higher costs on through higher prices. He questioned whether further military action could improve the situation and attributed elevated oil prices partly to that uncertainty.

Grandich identified the midterm elections as a potential turning point for policymaking. If Democrats regained the House and also took the Senate, he said, President Trump could face political and personal battles that hinder legislation during his remaining two years. He described that prospect as a burden for a country with $40 trillion in debt and annual spending exceeding revenue by $2 trillion to $3 trillion.

Small business owners were already facing difficult operating conditions, he added. Grandich said his financial planning business was part of a group managing almost $2 billion, with small business owners across the United States accounting for nearly half its clients. Those clients cited costs, regulation and legal issues as obstacles, and he warned that deeper political gridlock could delay action on major problems.

Grandich acknowledged that energy stocks could continue to perform well but said he did not consider them undervalued. He characterized the sector's advance as potentially being in its later stages and reiterated his bearish view of the broader equity market.