Key Takeaways
- • Elliott Investment Management, which manages $80 billion in assets, warned in an investor letter reported by the Wall Street Journal that "virtually every alarm bell warning of a substantial bear market ahead is ringing."
- • The firm flagged risks in the AI trade, including circular financing between AI frontier companies and AI equipment manufacturers, growing reliance on debt to fund the buildout, and political backlash against AI deployment.
- • Elliott warned that disruption in one or two of the factors behind the rally could trigger a cascading unwind, shifting sentiment from FOMO to "FOGO" (fear of getting obliterated).
- • Per Bloomberg, the Magnificent Seven stocks have shed about $4 trillion in market value since Oct. 15, and Goldman Sachs trader Bobby Molavi noted that 60% of the S&P 500 is in bear market territory.
- • Despite the warnings, stocks rallied sharply on the day after the U.S. midterm elections, with the Dow up 1,500 points (3%) and the S&P 500 up about 1.7%, while the S&P 500 has gained roughly 11% year to date.
Summary
Elliott Investment Management, which handles $80 billion in assets, has warned of a sustained equity sell-off that could develop into a bear market. In an investor letter reported by the Wall Street Journal, the firm said that "virtually every alarm bell warning of a substantial bear market ahead is ringing." Elliott directed particular concern at the AI trade, citing circular financing between AI frontier companies and the manufacturers of AI equipment, the sector's growing reliance on debt to finance its buildout, and a developing political backlash against the deployment of AI.
The letter argued that many supporting factors have aligned to produce the current boom, so disruption to only one or two could reverse the momentum. It warned of "a cascading, self-reinforcing unwind of this bull market and an abrupt change from FOMO to FOGO (fear of getting obliterated)."
A bear market is generally defined as a decline of 20% or more in equity prices from prior highs, distinct from a correction of about 10%. According to Bloomberg, the Magnificent Seven stocks, including Google, Amazon and Apple, have lost roughly $4 trillion in market value since Oct. 15. Goldman Sachs trader Bobby Molavi observed in a client note that 60% of the S&P 500 is in bear market territory, with AI companies supporting a large share of the index's growth.
Markets nonetheless rebounded after the midterm elections, which produced Democratic gains that returned control of the House and Senate. The Dow rose 1,500 points, or 3%, in Wednesday afternoon trading, and the S&P 500 gained about 130 points, or 1.7%. Former Obama economist Jason Furman noted on X that health and solar stocks rose while data center and Musk-related stocks fell. The S&P 500 is up about 11% so far this year. Historically, bear markets occur roughly every six years on average and eventually end with markets recovering lost ground over the long run.
The letter argued that many supporting factors have aligned to produce the current boom, so disruption to only one or two could reverse the momentum. It warned of "a cascading, self-reinforcing unwind of this bull market and an abrupt change from FOMO to FOGO (fear of getting obliterated)."
A bear market is generally defined as a decline of 20% or more in equity prices from prior highs, distinct from a correction of about 10%. According to Bloomberg, the Magnificent Seven stocks, including Google, Amazon and Apple, have lost roughly $4 trillion in market value since Oct. 15. Goldman Sachs trader Bobby Molavi observed in a client note that 60% of the S&P 500 is in bear market territory, with AI companies supporting a large share of the index's growth.
Markets nonetheless rebounded after the midterm elections, which produced Democratic gains that returned control of the House and Senate. The Dow rose 1,500 points, or 3%, in Wednesday afternoon trading, and the S&P 500 gained about 130 points, or 1.7%. Former Obama economist Jason Furman noted on X that health and solar stocks rose while data center and Musk-related stocks fell. The S&P 500 is up about 11% so far this year. Historically, bear markets occur roughly every six years on average and eventually end with markets recovering lost ground over the long run.
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