US stocks ended lower on Monday as concerns over the pace and safety of artificial intelligence development weighed on technology shares, with the S&P 500 falling 0.48% to 7,620.05 and the Nasdaq Composite dropping 0.55% to 26,187.79. The selloff was triggered by Anthropic CEO Dario Amodei's call for a slower pace of development of advanced AI models in an essay published on Saturday, with the company unilaterally committing to providing third-party evaluators with permanent, employee-level access to their systems. OpenAI CEO Sam Altman backed the proposal, while xAI's Elon Musk said, "Dario is right." Among individual stocks, Nvidia fell 3.4%, Broadcom slid nearly 5%, and Micron and AMD each dropped more than 4%, dragging the Nasdaq 100 down as much as 1.3%. The weakness in technology stocks came alongside growing pressure from the bond and oil markets, with the benchmark 10-year US Treasury yield briefly moving above 5% for the first time since 2023, adding to investor concerns ahead of this week's Federal Reserve meeting.
Global market analysts are now warning that the artificial intelligence-fueled rally may be entering its final phase, with Capital Economics projecting the S&P 500 will finish 2026 at 8,250, a 7.7% gain, before plunging 21% to 6,500 by the end of 2027. According to Capital Economics senior markets economist James Reilly, the data indicates a late-stage bubble with most factors at levels that have preceded past stock market peaks. The warning comes as the market's cyclically adjusted price-to-earnings ratio approaches levels last seen at the dotcom era peak, while forward 12-month earnings-per-share growth has reached a pace matching the dotcom bubble's zenith. Market breadth has narrowed dramatically, with a handful of mega-cap technology names accounting for an outsized share of index gains, a pattern that historically accompanies rallies that eventually reverse sharply. The combined free cash flow of the largest AI hyperscalers is expected to turn negative in 2027 as capital expenditures on data centers and chips continue to surge, further supporting the bubble thesis. The global AI bubble warnings suggest this surge in equity issuance may be a critical trigger for the unwinding of the current AI trade, as higher borrowing costs would squeeze the AI complex on multiple fronts. For market participants who remember the dotcom bust of 2000-2002, the parallels are difficult to ignore, with the Nasdaq Composite falling roughly 78% from its peak during that period, and many technology companies never recovering their highs.
India's mid- and smallcap rally is showing no signs of losing steam, with investors continuing to chase themes such as artificial intelligence, defence, power, data centres and manufacturing. However, according to Invesco Mutual Fund's Head of Equities Aditya Khemani, the market is becoming increasingly polarised beneath the headline gains. As reported by The Economic Times, over the last six months, the market has increasingly differentiated between traditional and emerging segments, creating significant performance gaps. Traditional sectors such as consumer staples, banking, and IT have largely underperformed, while emerging areas such as fintech, consumer technology, and AI value chain segments have delivered strong returns. The lack of rotation between these two segments is particularly concerning, with valuations becoming increasingly stretched in certain pockets driven by strong narratives and earnings momentum. On an aggregate basis, there are signs of growing complacency in some parts of the broader market, with similar trends observed globally where investors are increasingly gravitating towards select themes and growth narratives, resulting in significant valuation divergence across sectors. The current market environment requires a disciplined approach, with investors paying particular attention to the valuations they are paying for individual companies, as over shorter time horizons, market corrections often tend to be sharper in expensive stocks and sectors that have previously enjoyed strong investor enthusiasm.
Khemani warns against confusing strong earnings momentum with business quality, especially when red flags such as weak cash flows or stretched valuations are overlooked. According to the interview with ETMarkets, over shorter periods, earnings momentum tends to be a significant driver of stock performance, but when earnings momentum begins to weaken, investors often realise they may have mistaken earnings momentum for business quality. Investors need to be particularly discerning and disciplined in their stock selection, with a strong focus on fundamentals and quality rather than relying solely on growth narratives or near-term earnings trends. The current market environment requires a disciplined approach, with investors paying particular attention to the valuations they are paying for individual companies. Over shorter time horizons, market corrections often tend to be sharper in expensive stocks and sectors that have previously enjoyed strong investor enthusiasm and substantial valuation expansion, making valuation discipline increasingly important for investors today. The global AI bubble warnings add urgency to this message, as analysts point to historical precedents where similar valuation extremes have preceded significant market corrections.
While India is not viewed as a major direct beneficiary of the AI revolution, certain segments such as power transmission and distribution, data centres, and related infrastructure have emerged as India's AI play. As reported by The Economic Times, these areas have seen valuations become quite expensive. The defence sector is also witnessing clear divergence, with private-sector players significantly outperforming public-sector companies. This performance is being driven by both the broader indigenisation push and increasing participation of private companies in the sector. For capital-intensive sectors, it will take time to determine how attractive their long-term returns and economics ultimately prove to be, but at the moment, anything associated with these themes continues to perform strongly. Investors need to be particularly selective and thoughtful about the areas in which they choose to participate, with companies and sectors linked to the AI supply chain performing exceptionally well globally. The global AI bubble warnings suggest this may be a temporary phenomenon, as analysts point to the unsustainable nature of current valuations and the potential for significant corrections once the bubble deflates.
According to Khemani's analysis reported by The Economic Times, FII ownership has declined to around 15%, while domestic institutions have grown significantly in scale and influence. The impact of FII flows on the market is far lower than it was six to seven years ago when FII ownership stood at nearly 25%. Indian households remain under-allocated to equities relative to other asset classes, and as financialization continues and retail participation in mutual funds grows, domestic flows are likely to remain strong. This shift not only strengthens the domestic investor base but also makes the market less dependent on foreign capital than in the past. Such a development would help alleviate inflationary pressures, reduce the need for further monetary tightening, and provide greater support to economic growth, with the influence of foreign investors on the Indian market having gradually declined over the years. The domestic liquidity support becomes increasingly important as global markets face potential corrections, providing a more stable foundation for Indian equities.
The IPO pipeline is witnessing significant activity, with a steady pipeline of IPOs across sectors over the last six months. As reported by The Economic Times, different categories of investors have different objectives - short-term investors may choose to monetize gains around listing time, while long-term investors often use such opportunities to build positions. Most institutional participants such as mutual funds and insurance companies typically approach IPO investments with a long-term perspective. With respect to the upcoming NSE IPO, Khemani noted that equity exchanges represent a strong and resilient business model that tends to benefit from economic growth and rising capital market participation. The pipeline for initial public offerings and follow-on equity sales has also swelled, a pattern that historically signals that a bubble's end is months away rather than years. The global AI bubble warnings suggest this surge in equity issuance may be a critical trigger for the unwinding of the current AI trade, as higher borrowing costs would squeeze the AI complex on multiple fronts. For market participants who remember the dotcom bust of 2000-2002, the parallels are difficult to ignore, with the Nasdaq Composite falling roughly 78% from its peak during that period, and many technology companies never recovering their highs.
