The stock market sold off hard on Friday.
The pullback wasn’t unexpected and should not have been surprising. As we have been outlining to our clients for the last two weeks, both credit and breadth were signaling that a pullback was imminent.
High yield credit usually leads stocks. The reason for this is simple: high yield credit/ junk bonds have a high chance of default even under ideal economic conditions. As a result of this, investors who trade these securities tend to be A) more sophisticated that stock investors from a macroeconomics perspective and B) extremely sensitive to changes in the financial system/ economic landscape.
The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) serves as a decent proxy for this segment of the debt markets. You’ll note in the below chart that it bottomed before the S&P 500 in late March and led stocks higher throughout April. Throughout last week it was suggesting a dip to 7,400 on the S&P 500 was coming in short order.
Again, this pullback was not unexpected. However, what was unexpected was the severity of the selling. Most major indices finished the day down over 2%, with momentum stocks dropping double digits.
The S&P 500 dipped down below its 21-day exponential moving average (EMA) for the first time since this bull run began nine weeks ago. Again, the dip was expected, but the severity was extreme.
This is a significant warning that the uptrend is in danger. How the market reacts in the first half of this week will determine whether this was just a “garden variety” dip in a bull market, or if stocks are in danger of something worse.
What is telling is that the Trump administration immediately surfaced over the weekend to talk about potentially taking stakes in large AI-companies.
As I’ve noted before, the AI-theme is the dominant theme for the bull market begun in late 2022. Since that time, AI-related stocks have accounted for 75% of market gains, 80% of market profits and over 90% of capital expenditures.
The fact the Trump administration is already talking about an implied bailout of large AI-companies is a major warning. It’s well known that the most famous AI company, OpenAI which first introduced the public to Large Language Models (LLMs) with the launch of ChatGPT in November 2022 is in significant financial trouble: the company has over $100 billion in commitments on just $26 billion in annual revenues. Indeed, OpenAI CEO Sam Altman has been hinting at the need for a bailout since third quarter of 2025.
In this context, the fact the President of the United States is suggesting that the government take stakes in AI companies just a few days after a severe market sell-off is deeply concerning. Does the White House know something about AI that it isn’t telling us? Are these companies not actually the highly profitable market leaders that they claim to be? Or is there something systemic happening under the surface that the White House is attempting to get “in front of”?
We’ll know shortly.
To receive my daily market commentary outlining the most important developments in the markets…
Best Regards
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
