‘Buy the Dip’ Is Still Alive. The AI Trade Is, Too.

Traders at the New York Stock Exchange on Nov. 13. (Spencer Platt/Getty Images)

Ominous clouds gathered on Wall Street this week—and may have passed just as quickly. It’s a sign that investors aren’t ready to abandon this remarkably persistent bull market.

Despite a sharp selloff on Thursday, and lots of intraday volatility, the S&P 500 index was poised to end the week up 0.2% and just 2% below its all-time high. The Nasdaq Composite , which had fallen three days in a row, also bounced back on Friday, and was set to finish the week off just 0.4%. The Dow Jones Industrial Average was the strongest of the bunch: The blue chip benchmark was up 0.5% for the week and less than a percentage point away from the all-time high it hit on Wednesday.

Created with Highcharts 9.0.1Market SnapshotSource: FactSet

Created with Highcharts 9.0.1Dow Jones Industrial AverageS&P 500 IndexNASDAQ Composite IndexRoundhill Magnificent Seven ETFNov. 10Nov. 11Nov. 12Nov. 13Nov. 14-3-2-101234%

“There is still a buy-the-dip mind-set,” says Luca Paolini, chief strategist at Pictet Asset Management. “A lot of investors have missed the rally.” There is a lot of money waiting to pounce on any selloff.

Which isn’t to say everything has been perfect. The market has been lifted by two themes of late—artificial-intelligence growth and interest rate cuts from the Federal Reserve—and both faltered this past week. Fed board members questioned whether it makes sense to cut rates again in December, and traders now see only a roughly 50% chance of that happening.

And there were some signs of trouble in the AI world. Data-center owner Coreweave says on Monday that it’s having trouble getting its data centers ready fast enough because of a supply-chain problem at a third-party developer. The stock dropped 16% the next day.

If AI development slows while interest rates remain elevated, the market’s two problems could compound. Some tech companies building data centers have taken out debt to fund their aspirations, so they would get hit extra-hard by high interest rates on that debt. Debt-heavy companies have been particularly vulnerable to the selloff over the past week. Among the most prominent decliners were Coreweave and software giant Oracle . The fear is that the AI bubble will pop, the debt will come due, and AI tools won’t be pumping out enough cash to cover it all.

But there’s no sign yet that the bubble is popping, and Big Tech firms generate enough cash from their core operations to cover their capital needs for years, bulls note. Despite all the AI spending, analyst estimates for tech earnings over the next year have risen 9% over the past three months, twice as much as the broader S&P 500, notes Keith Lerner, chief investment officer at Truist Advisory Services.

“Every bull market has a dominant theme,” he says. “This one is AI and tech. In a rising market, leadership tends to endure. If you believe the bull market is intact, it’s too early to give up on tech.”

That’s not to say that the direction will be straight up. The market’s performance has been remarkable since April, with the S&P 500 rising 38% and semiconductors up over 120%. In that period, there haven’t been any pullbacks that took the S&P 500 down 5% or more. Historically, those kinds of pullbacks happen every 77 days, says Lerner.

Next week Nvidia will report its third-quarter earnings. The results will likely determine whether the dark clouds are gone for good, or whether they could hang around a while longer.

Write to Avi Salzman at avi.salzman@barrons.com