2 Factors That Could Trigger a Stock Market Selloff

The stock market’s rally depends on continuing enthusiasm for AI. (Krisztian Bocsi/Bloomberg)

Even the strongest bull market has an Achilles’ heel, and this one might even have two.

Stocks were edging lower to start the week, but the S&P 500 was still up nearly 10% since the start of 2025, just a hair’s breadth below last week’s record close of 6468.54.

Investors might have expected things to go differently, given recent negative headlines. The consumer price index, which came in just below expectations, nonetheless showed inflation is still far from the Federal Reserve’s 2% target. Then the producer price index ran hot, jumping to its highest level since March, a potential detriment to corporate earnings.

Meanwhile, tech earnings reports from Coreweave to Applied Materials disappointed investors. The geopolitical situation hasn’t changed much. And a September interest rate cut might not even satisfy markets.

Yet none of those events was enough to put a dent in the rally, for the simple reason that they weren’t “enough to make investors think that 1) Tariffs may cause stagflation or 2) Meaningfully reduce AI enthusiasm,” writes Sevens Report President Tom Essaye. For him, those two threats are the only things that could torpedo the current market.

There is a lot of noise right now, Essaye writes, with conflicting economic and inflation data, concerns about data validity, and geopolitics, among other concerns. Investors need to stay focused on whether the news makes stagflation more likely or would damp enthusiasm for AI.

“As long as the answer to both is ‘no,’ then while stocks may see some volatility, the trend in this market should remain higher,” he writes.

Essaye isn’t the only one who argues that those two factors are crucial to the rally’s success.

Morgan Stanley Chief Investment Officer Lisa Shalett warns the bull market narrative of AI benefits applies to a smaller band of companies than investors might think.

In the past five years, the megacap tech companies have accounted for over half of stock market returns.

They have also accounted for more and more of the S&P 500, meaning “passive-index risk [is] increasingly about a single issue: returns on AI investment for a handful of companies.”

Should that falter, it would reverberate throughout the index, making her more skeptical of unprofitable tech companies and smaller caps that are less likely to be able to ride the AI wave.

Moreover, she argues investors should be mindful of market breadth.

“[S]hould stagflation, margin headwinds and capex impediments become more understood, markets will remain risky and narrow, with action concentrated in the largest-cap names,” Shalett writes.

Likewise stagflation was the main concern behind Barry Bannister’s bearish market call last week.

Stifel’s chief equity strategist—who thinks that the S&P 500 could fall back to 5500—warned AI investment won’t save the economy, a fact that will become clearer as hyperscalers Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle pull back their capital expenditures in this area.

The current rally has endured a tumultuous 2025, recovering from the worst shocks so far. But even bulls have their breaking point.

Write to Teresa Rivas at teresa.rivas@barrons.com