Over the last two weeks, many investors have started asking the same question:
Has the AI trade finally broken?
Not so fast.
While technology stocks have stumbled, the broader market has held up remarkably well. Small-cap stocks outperformed again, value stocks continued to lead growth, and sectors like financials, materials, and consumer staples quietly picked up the slack.
What we're witnessing may not be the end of the bull market.
It may simply be a changing of the guard.
The Economy Continues to Surprise
Despite persistent inflation and elevated energy prices, the economy remains resilient.
Employment trends continue to improve.
Consumer spending remains solid.
Second-quarter earnings expectations have risen to 22%, up from 19% just two months ago.
In other words, corporate America continues to deliver.
And as long as profits keep growing, markets typically find a way to move higher.
Inflation Is Still the Story
The latest inflation numbers were hardly comforting.
Headline CPI rose 4.2% year-over-year, placing current readings among the highest historical deciles. Yet core inflation remains relatively contained, suggesting higher energy costs have not fully spread throughout the economy.
That distinction matters.
It gives the Federal Reserve room to remain patient.
But investors have already undergone a dramatic shift in expectations. At the start of the year, markets anticipated multiple rate cuts. Now, futures markets are pricing in rate increases over the next twelve months.
That is a remarkable change.
The Next Test Is Coming
The market's "buy-the-dip" mentality has worked beautifully for years.
But another test is approaching.
A wave of large technology IPOs is expected to hit the market, led by SpaceX. At the same time, bond yields remain a risk, inflation remains sticky, and the Strait of Hormuz still has not reopened.
Markets have repeatedly rewarded optimism.
Eventually, optimism gets tested.
Credit Markets Remain Calm
One encouraging sign is that credit spreads remain tight.
Historically, serious bear markets are accompanied by stress in credit markets.
We're not seeing that.
Private credit defaults have increased modestly, but conditions remain nowhere near the levels experienced in 2008.
For now, the financial system remains healthy.
My Perspective
This market continues to impress.
Technology has cooled, but the broader market hasn't cracked.
Earnings remain strong. The economy remains firm. And policymakers have every incentive to avoid causing a recession.
Still, investors should not become complacent.
Years of successful dip-buying have created tremendous confidence. History teaches us that confidence often peaks right before markets face their next challenge.
Bottom Line
Inflation remains stubborn.
Earnings remain strong.
Market leadership is expanding beyond technology.
Credit markets remain healthy.
That's constructive.
But with valuations elevated, bond yields rising, and expectations still high, the market's next test may be closer than many investors think.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on exit planning, estate strategies, asset protection, and long-term wealth structuring.