After stocks plunged Friday and the Nasdaq gave up its year-to-date gates, investors may wonder whether or not the US equity bull market is at risk. Below are key reasons the selling may have been overdone and the bull market remains fully intact:
Seasonal Weakness is Normal at this Time of Year
On Wall Street, seasonality is the study of how stocks historically perform during specific times of the year. Like a farmer who must seek to plant crops during periods when the climate allows, investors use historical data to give them an additional edge when investing. More sophisticated stock analysts also account for other factors to make the data and the odds more accurate.
For example, the end of February in a post-election year (like 2025), tends to be very weak as investors come down from the presidential election euphoria.
Image Source: Ryan Detrick, Carson Investment Research
Bull Market Drawdowns are Normal
Meanwhile, the S&P 500 Index averages multiple drawdowns a year, with the average annual drawdown being ~14.2%. For this reason, investors must understand their time frame, manage risk, and avoid being top-heavy when the market gets stretched.
Monthly OPEX can Cause Volatility
Finally, Friday’s drop may have been exaggerated by monthly OPEX (options expiration). Price action is often funky during monthly OPEX days as options traders reposition. As I mentioned in my Tech Innovators service, the Friday of February OPEX was lower in 14 of the past 24 instances. With OPEX shenanigans out of the way, stocks may be able to stabilize.
Government Job Cut Impact Overblown
The impact of Elon Musk’s “Department of Government Efficiency” (DOGE) is another headline on Wall Street that may be causing downward selling pressure. Musk’s team has already offered generous payout packages for government employees and ended work-from-home policy. However, President Trump urged Musk last week to be more aggressive in shrinking the government. In recent years The government job market has become a larger slice of the overall job market. The recent cuts have already taken a toll on the Washington DC housing market, but some investors believe it may impact the overall jobs market.
Fortunately, there is a historical precedent for such a situation. Carson Group Market Strategist Ryan Detrick points out, “During the President Obama budget cuts of 2011-2014 a total of 146k federal jobs were cut. The economy still grew by more than 8 million jobs.”
Image Source: US Bureau of Labor Statistics
In other words, DOGE fears are likely overblown.
Sentiment: One Foot Out the Door
With the major indices all within 5% of all-time highs, sentiment measures like the CNN Fear and Greed Index show that investors are skittish. The CNN Fear Greed Index flashed a “Fear” reading money morning.
AI Spending Remains Strong
AI and technology stocks have led the market higher, so naturally, investors are concerned about a slowdown in AI spending. Just this morning, Apple (AAPL) announced plans to spend more than $500 billion to accelerate its AI investments. Apple also announced plans to integrate Alphabet’s (GOOGL) Gemini AI into Apple intelligence. Meanwhile, a rumor shook stocks this morning as a report emerged stating that Microsoft (MSFT) would slow down AI spending and cancel current orders. However, a Jeffries report “strongly refutes” any changes to MSFT’s AI strategy.
Meanwhile, Chinese AI spending is soaring. Alibaba (BABA) announced plans to invest $53 billion in cloud and AI infrastructure over the next three years. Regardless of their point of view, investors will get more information about AI spending when AI leader Nvidia (NVDA) reports earnings on Wednesday after the close.
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This article originally published on Zacks Investment Research (zacks.com).
