AI has been carrying the stock market. An industry pause could pull the rug out, warns this Wall Street giant.

By Barbara Kollmeyer

Midterm elections, higher bond yields and oil prices are other obstacles

Artificial intelligence has been a driver for corporate earnings this year, but safety calls by leading large-language-model developers could put a crimp in that, warns Citigroup.

A turbulent start is brewing for stock markets, with technology set to drive a lower open after leaders of big artificial-intelligence companies said advances in AI should be slowed because of safety concerns.

Fresh alarm from those AI leaders is one reason Citigroup has turned more cautious on U.S. stocks in our call of the day.

"We shift to neutral on U.S. equity risk," a Citi team led by Stuart Kaiser, head of U.S. equity trading strategy, told clients in a note Sunday night. "A potential slowdown in AI model development could crimp [earnings-per-share] revisions."

Equity trading strategy tends to focus on short-term market mechanics, positioning and execution, as opposed to the bank's more fundamental macro-led equity strategy.

Kaiser and his team also cite the following as reasons for that shift: November's midterm elections - in which the Republicans could lose both the House of Representatives and the Senate - and the sharply higher bond yields and surging oil prices that have emerged as cross-asset headwinds for stocks.

"The first of those risks is the key," they say of mounting concern about an AI slowdown. "If the trickle-down EPS story comes into question, it would weaken the key pillar of the equity rally."

Much of the S&P 500's SPX nearly 12% gain this year has been driven by increasing optimism from companies tied to the AI investment theme.

The strategists say they'd hedge against any weakening via put options on the "QQQ" QQQ - an exchange-traded fund that tracks the Nasdaq-100 - or the VanEck Semiconductor ETF SMH. Such options contracts give investors a right to sell those assets at a specific price level by a specific date.

Kaiser and his team note that last week's 0.8% drop by the S&P 500 - the biggest weekly decline since the week ending Aug. 21 - was about stocks falling "victim to macro risks without the shelter of earnings." Equities for now are facing a stretch with no earnings, a seasonally weak month of September and a summer pullback that has set a "higher bar to re-engage," they say.

Their "road map" to what lies ahead: The S&P 500 stays stuck in a range of 2% higher and 2% lower from August highs, keeping "investors on the sidelines." A drop of around 3% to 5% could draw in some dip buyers, but "markets would need to test all-time highs to trigger a chase," they say.

Citi expects companies linked to power generation and data centers to be more affected by the flow of news surrounding the midterm elections than semiconductor and memory stocks. "That said, [AI] safety concerns could dampen enthusiasm, as was the case in early February."

Citi strategists say markets can keep rallying on limited Federal Reserve interest-rate hikes - two or three - owing to strong earnings growth, solid labor markets and largely stable, even if above-target, inflation.

The markets

All three major indexes (ES00) (YM00) are pointing south, with Nasdaq futures (NQ00) down 1.8%. Oil prices (CL.1) (BRN00) are up more than 3% after Saudi Arabia shut a major pipeline. The 10-year Treasury yield BX:TMUBMUSD10Y is steady at just under 5%, with the dollar DXY higher.

 
Key asset performance                                                Last       5d      1m      YTD     1y 
S&P 500                                                              7656.98    -0.80%  -1.65%  11.85%  16.29% 
Nasdaq Composite                                                     26,333.04  -0.66%  -1.48%  13.30%  18.93% 
10-year Treasury                                                     4.964      17.50   23.80   79.20   92.00 
Gold                                                                 4320.5     -3.50%  -3.41%  -0.27%  16.16% 
Oil                                                                  102.77     12.66%  20.98%  79.01%  62.41% 
Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

In a newsy weekend on the AI front, CEO Sam Altman said OpenAI won't target an initial public offering this year and noted that making AI safer will entail "significant costs."

Anthropic CEO Dario Amodei's weekend urging of an AI slowdown was backed by Altman as well as Elon Musk and Google DeepMind's Demis Hassabis.

The response among tech stocks to that AI slowdown call has been negative, with companies from Marvell (MRVL) to Hewlett Packard Enterprise (HPE) dropping, while cybersecurity companies CrowdStrike (CRWD) and Palo Alto Networks (PANW) are up, also boosted by a hack against fintech Revolut. Korean stocks KR:180721 Samsung (KR:005930) and SK Hynix (KR:000660) and Japan's SoftBank (JP:9984) tumbled.

How the clash between money and safety created a monumental crisis for AI..

The chart

If the Fed lifts rates on Wednesday, stocks could be in for a rough patch, according to this chart from Goldman Sachs. Strategists led by Ben Snider note, though, that the market has "already priced substantial Fed tightening in coming months." They said the S&P 500 generated an average three-month return of negative-2% at the start of seven hiking cycles over the last few decades. The index then generated an average 12-month return of plus-9%, with positive returns in every episode but 2022. "The medium-term impact of Fed tightening on equities will depend on how tightening affects earnings growth, which is the most important driver of stocks," they said.

Top tickers

These were the most searched ticker symbols on MarketWatch as of 6 a.m.:

 
Ticker symbol  Security name 
NVDA           Nvidia 
TSLA           Tesla 
SPCX           SpaceX 
MU             Micron 
GME            GameStop 
INFY           Infosys 
AMD            Advanced Micro Devices 
AAPL           Apple 
TSM            Taiwan Semiconductor Manufacturing 
ORCL           Oracle 

-Barbara Kollmeyer

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(END) Dow Jones Newswires

09-14-26 0811ET