Stocks Are Fighting Two Opposing Forces at Once
$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ 100(NDX)$ $Invesco QQQ(QQQ)$ $Dow Jones(.DJI)$ $Corgi Mag 7 ETF(CMAG)$
U.S. equities have entered a period of exceptionally high volatility, with the market repeatedly opening with large gap-ups and gap-downs at the start of this week. Buying and selling flows have been shifting sharply from the opening bell, reflecting a rapid change in investor sentiment even before regular trading begins.
We believe this behavior is being driven by two opposing forces simultaneously affecting the market: heightened risk-off sentiment stemming from escalating Middle East tensions, and renewed bargain buying in AI and semiconductor stocks supported by expectations for strong Big Tech earnings.
On one session, aggressive buying in AI and semiconductor names, combined with optimism surrounding upcoming earnings, drove a powerful gap-up open. The following day, however, rising U.S.–Iran tensions, higher oil prices, and renewed concerns about interest rates quickly reversed sentiment and triggered a gap-down opening. This pattern highlights that the market is currently reacting not only to corporate earnings, but also very sensitively to geopolitical developments and macroeconomic conditions.
As noted in our previous update, this week has so far been characterized by a technical stabilization phase following last week's sharp selloff. Oversold conditions have attracted short-term bargain buying, creating a temporary downside support structure. Despite the elevated volatility, market behavior has generally remained within the range anticipated by our Pretiming framework, and our broader outlook has not materially changed at this stage.
The most important variable going forward is the evolution of military tensions between the United States and Iran, and the resulting direction of global oil prices.
If geopolitical risk persists and crude oil continues to rise—or remains elevated for an extended period—inflationary pressure could re-accelerate. Such a development would not only weaken expectations for Federal Reserve rate cuts, but could even reopen market discussions around the possibility of future rate hikes. In that scenario, the U.S. equity market, which is still trading at relatively elevated valuations, could cool much more quickly than investors currently expect.
Importantly, the fundamental AI growth story has not disappeared. Semiconductor demand remains strong, and the major technology companies continue to deliver generally solid earnings. However, the market is increasingly shifting its focus from current earnings toward a more important question: Can the present scale of AI investment remain financially sustainable?
Many large technology companies are now investing in AI infrastructure at a pace that exceeds the cash flow generated by their core operations, while also increasing their reliance on external financing, including corporate bond issuance. If interest rates remain higher for longer—or rise further—the cost of funding these investments will inevitably increase. At the same time, if the monetization of AI initiatives takes longer than expected or fails to meet market expectations, investors may begin pricing in future earnings pressure and balance-sheet risk.
As a result, the market is gradually moving into a phase where investors are evaluating not just whether companies are reporting good earnings today, but whether they can continue to justify their current valuations through sustained growth, durable cash generation, and economically viable AI investment. Even without an actual deterioration in earnings, a weakening of investor expectations or growing skepticism about future growth could lead to a rapid compression of the valuation premium that has supported the U.S. equity market over the past year.
From a Pretiming perspective, if the market transitions into the broader downside phase we have projected beginning next week, and if the monthly trend shifts into a confirmed corrective structure, we believe the most likely drivers would be the combination of geopolitical risk, higher oil prices, a less favorable interest-rate environment, and a reassessment of the AI investment narrative. Under our current framework, such a monthly corrective phase could potentially extend into the October timeframe.
Accordingly, the single most important catalyst for near-term market direction remains U.S.–Iran war-related developments and the behavior of crude oil prices. Each major headline has the potential to trigger significant swings in investor sentiment, which is why large opening gaps and elevated intraday volatility may continue for some time.
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