For months, artificial intelligence has been one of the most powerful forces driving stock prices higher.
Now investors are beginning to question the enormous amounts of money being committed to the technology.
Last week, the S&P 500 declined 0.56%, while the NASDAQ fell nearly 2%. Communication services dropped more than 8%, reflecting renewed pressure on some of the market's largest technology-related companies.
But something interesting happened beneath the surface.
The equal-weighted S&P 500 actually gained 0.8%, and small-cap stocks advanced 3%.
The market isn't necessarily falling apart. But its leadership is changing, and the risks are becoming more serious.
AI Is Real. The Investment Expectations May Not Be.
I don't question that artificial intelligence will transform businesses and create tremendous opportunities.
What I do question is whether the financial expectations surrounding AI have become unrealistic.
Billions are being committed to data centers, infrastructure, computing capacity, and energy production. Yet investors are increasingly asking a fundamental question:
When will all this spending translate into sustainable free cash flow?
That distinction matters.
History is filled with transformative technologies that ultimately changed the world but produced significant investment losses along the way.
AI may prove no different for some companies.
The technology can be extraordinary without every investment being profitable.
Credit Markets Are Starting to Show Concern
Perhaps the most important development this week isn't happening in stocks.
It's happening in credit.
Spreads on certain corporate debt instruments have begun widening, suggesting lenders are becoming more concerned about risk, including the financing of AI-related investments.
That deserves attention.
Stock prices frequently reflect optimism about future earnings. Credit markets are more focused on something fundamental:
Will borrowers be able to meet their financial obligations?
We are not seeing evidence of a broad credit crisis, but widening spreads can serve as an early warning that investors are becoming less comfortable taking risks.
Earnings Are Strong, But the Surprises Are Getting Smaller
Corporate earnings remain a major support for the market.
Companies reporting third-quarter results have exceeded earnings expectations by approximately 6.5%.
That's encouraging.
However, the size of those earnings surprises has declined from earlier this year. Revenue surprises are also moderating.
More importantly, a substantial portion of the earnings outperformance has been concentrated in just a few companies.
This reinforces a concern I've raised repeatedly:
When expectations become exceptionally high, even good results may no longer be good enough.
The Fed Still Has an Inflation Problem
Despite signs of market weakness, the broader economy continues to demonstrate resilience.
Consumer confidence improved in October, and economic activity remains relatively solid.
Meanwhile, inflation remains stubborn, and the situation in the Middle East continues to create uncertainty around energy supplies and prices.
The Federal Reserve's recent decision to hold rates steady may prove temporary. Additional tightening remains a possibility if inflation fails to improve.
That creates a challenging combination:
Strong enough economic growth to sustain inflation, but growing financial market concerns that could eventually threaten that growth.
My Perspective
I continue to believe the economy has a reasonably strong foundation, supported by corporate profitability, business investment, and technological innovation.
But I am becoming more cautious about the investment environment.
The AI spending boom is being challenged. Credit markets are beginning to reflect greater concern. Inflation remains unresolved, and higher interest rates continue to create financial pressure.
At the same time, the average stock has been performing considerably better than the headline indexes, suggesting investors are rotating rather than abandoning equities altogether.
That is encouraging.
The question now is whether this remains an orderly market rotation or develops into something more consequential.
Bottom Line
The bull market isn't necessarily over.
But the next phase may look very different from the last.
AI companies will increasingly need to demonstrate financial returns, not simply technological possibilities.
Corporate earnings will need to remain strong.
And credit markets will need to stabilize before investors can become more comfortable with risk.
This is not an environment that calls for emotional decisions.
It calls for discipline, diversification, and a willingness to reassess assumptions when circumstances change.
The greatest investment risks often emerge when yesterday's successful strategy becomes tomorrow's unquestioned assumption.
Planning Perspective — Protecting What You've Built
Periods of market uncertainty are an important reminder that building wealth and protecting wealth require different disciplines.
For business owners, this becomes particularly important when considering succession, a potential sale, estate planning, income taxes, or asset protection.
At Integrated Wealth Management, we help business owners coordinate these complex financial decisions into one cohesive strategy, working alongside their attorneys, CPAs, and other professional advisors.
If you're approaching a major financial decision—or simply haven't reviewed how your financial strategies work together—I invite you to schedule a confidential conversation.
The best time to prepare for life's most consequential financial decisions is before you're forced to make them.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on business succession, exit planning, estate strategies, asset protection, and long-term wealth structuring.