Does the Music Stop? Volatility Kicks In...

Does the Music Stop? Volatility Kicks In...

Our job is to look for risk reward setups of 1:5, and right now the entire market could be one.
A bit of higher volatility has already played as the overture.

2025 began in gloom and turned into one of the strongest years for the S&P 500, up 18.38% YTD including dividends.

What changed? Tech carried everything. Since April, the move has been all AI, or more precisely, AI spending.
MAG7 leads the performance again (see chart 1). Effectively, this is a DCF driven revenue forecasting illusion that has lifted valuations across the board. The market loves a story it can model, even if the cash flows live in 2035.

In chart 2 you can see that Apple and Amazon, who spend far less on AI, are lagging behind the AI heavyweights. Maybe that is a signal.

If the AI boom cracks, we could see a zero year with the S&P back near 5900, or a medium year closing around 6300 to 6400, a clean halving of the gains since April. Still bullish on paper, but with thinner oxygen (see chart 3).

Short term volatility may rise if the AI story falters, but the AI spending cycle remains intact and will likely define next year’s theme. The music plays on. There is still a trillion dollar OpenAI IPO to sell.