Stock Traders’ AI Wariness Threatens Seasonality Tailwinds

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(Bloomberg) -- A year-end rally in US stocks seemed like a lock a few weeks ago amid relentless appetite for artificial intelligence-linked shares, solid earnings and a history of seasonal strength. Now Wall Street isn’t so sure.

The S&P 500 Index has gained 1.5% in December on average since 1945, trailing only November’s performance, data compiled by CFRA Research show. But with the US equities benchmark on pace for a monthly loss, the whole notion of seasonality is being called into question, especially with traders jittery about AI valuations and spending plans.

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US stocks fell Tuesday, led by losses in technology shares amid anxiety over the AI chip rivalry between Nvidia Corp. and Alphabet Inc. Investor nervousness has been prevalent recently, with demand for hedges against losses in Big-Tech stocks near the highest since August 2024. And after three consecutive weeks of market turbulence, the VIX Index is sitting above the 20 mark that typically signals mounting market stress.

“Seasonality is always an investor’s friend, however it’s important to remember it’s not absolute,” said Dan Greenhaus, chief economist and strategist at Solus Alternative Asset Management LP.

The S&P 500 fell 0.2% at 10:26 a.m. on Tuesday, failing to sustain a two-day recovery that came as some Federal Reserve officials indicated support for an interest rate cut next month. The benchmark gauge down roughly 2% this month and is on track for its first monthly drop since April. That compares with a long-term gain of 1.5% in November, per CFRA Research data.

Ed Yardeni of eponymous firm Yardeni Research said the S&P 500 is unlikely to reach 7,000 by year-end, which would represent a roughly 4% gain from current levels, largely due to some profit-taking in AI-related stocks. At Roth Capital Markets, chief market technician JC O’Hara called for maintaining a cautious approach on stocks in a note Sunday.

“Uncertainty on AI payoffs and upside rate risk will likely limit how much the market can rally into year-end,” said Dennis Debusschere, chief market strategist at 22V Research.

Read: AI Bubble Air Loss Delays S&P 500 Rally to 7,000, Yardeni Says

While past performance overwhelmingly favors a year-end rally, investors are grappling with a murky backdrop marked by slowing economic growth, heavy spending on AI by American tech behemoths and division at the Fed about the pace of further rate cuts.

On the AI front, meanwhile, lofty valuations, circular financing deals, and sky-high expectations for growth have stoked skittishness around a potential bubble.

Positioning data is also flashing mixed signals about what traders can expect in the remainder of 2025. A Deutsche Bank AG measure of equity exposure turned underweight last week for the first time since July, data compiled by the bank’s strategists including Parag Thatte show.

But for mega-cap growth and technology shares, outperformance relative to the average stock is still at the top of its long-run trend channel despite the pullback, “leaving them vulnerable,” according to Thatte.

For optimists, history skews in their favor against all of the nerves. Whenever the S&P 500 rose at least 10% from early January through September but declined in November — like currently — December followed with gains each and every time going back to 1950, according to data from JPMorgan Chase & Co.’s trading desk.

“We remain tactically bullish,” JPMorgan’s head of global market intelligence Andrew Tyler told clients in a Nov. 24 note, citing resilient macroeconomic data, positive earnings growth, and a thawing trade war. “Additionally, historical seasonality stats also suggested a rebound.”

(Updates with Tuesday’s trading and news on Alphabet, Nvidia chip shakeup in third paragraph.)

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