The benchmark S&P 500 (^GSPC 1.24%) stock market index is down fractionally from its all-time high as I write this, but a wave of uncertainty is washing over the market right now, which has triggered some volatility over the last couple of weeks.
Investors are concerned that the world's leading artificial intelligence (AI) start-up -- OpenAI -- won't be able to fulfill its enormous financial commitments, and they are also weighing the impacts of a deteriorating job market, potentially resulting from some of the Trump administration's economic policies.
President Donald Trump has been in office during three major stock market drawdowns. During his first term, the S&P 500 suffered a peak-to-trough decline of almost 20% in 2018, followed by a much sharper 35% sell-off in 2020 at the height of the COVID-19 pandemic. Then, last April, the president's "Liberation Day" tariff announcement contributed to a brief 21% sell-off. Fortunately, the market recovered to set new all-time highs on each occasion, but are we headed for another steep correction or even a bear market? If so, here's what investors can expect.
Image source: Getty Images.
The AI trade just hit a speed bump
AI has already created trillions of dollars' worth of value for American companies. Nvidia, which supplies the world's best data center chips for AI development, has enjoyed a twelvefold increase in its stock price since the start of 2023, catapulting its market capitalization from $360 billion to a whopping $4.6 trillion.
But the AI industry is now facing a massive test. ChatGPT creator OpenAI has made hundreds of billions of dollars' worth of spending commitments to rent computing capacity from some of the industry's largest data center operators, including $281 billion to Microsoft Azure and $300 billion to Oracle Cloud Infrastructure. The start-up has also ordered an estimated $90 billion worth of chips directly from Advanced Micro Devices.
Here's the problem: OpenAI is generating annualized revenue of just $20 billion, so it doesn't have anywhere near enough money to meet all of its obligations. The start-up is banking on significant growth over the next few years, combined with substantial inflows from investors, but neither of those things is guaranteed. Nvidia, for example, was recently planning to invest $100 billion in OpenAI, but the deal is now on ice.
This will hurt OpenAI's ability to fulfill its commitments with providers like Microsoft and Oracle, which could in turn reduce their appetite for chips and other hardware from suppliers like Nvidia. Therefore, the domino effect could hurt the entire AI industry.
Check out the chart below to see the losses from some of the stocks with the most perceived exposure to OpenAI since the S&P 500 set its last record high on Jan. 28.
The job market is on shaky ground
The AI nervousness happens to be overlapping with a similar degree of concern for the U.S. job market. The unemployment rate is currently at 4.4%, which is near the highest level in five years, and there are signs it could get worse. For example, the recent Job Openings and Labor Turnover Survey (JOLTS) from the U.S. government showed there were just 6.5 million available positions across the U.S. in December, far below the 7.2 million economists expected.
Plus, American employers laid off over 108,000 workers in January, which was the highest number for a January since 2009. According to data from Challenger, Gray & Christmas, many businesses said economic conditions, a loss of contracts, and restructurings triggered the layoffs, while some even said they were closing down entirely.
The manufacturing industry has been particularly hard hit, losing around 72,000 jobs since Trump announced his "Liberation Day" tariffs last April. The levies on imported goods were supposed to make American products more competitive on the world stage, but their extremely broad scope seems to be making it too expensive for businesses to import raw materials and components, thus hurting the manufacturing sector.
Corrections are a normal part of the investing journey
Stock market sell-offs can be unsettling, but they are the price investors pay for the opportunity to earn significant returns over the long term. Besides, they are incredibly common. According to Capital Group, the S&P 500 suffers a decline of 5% or more once per year, on average, while a correction of at least 10% comes around once every two and a half years.
Bear markets (measured by peak-to-trough declines of 20% or more) are rarer but still happen every six years or so. If we exclude the very brief 20% crash sparked by "Liberation Day" last April, the last proper bear market occurred in 2022, so the current bull run probably still has legs.
However, the S&P 500 is trading at a historically expensive valuation, which could set the stage for downside in the near term. If a correction of 10% were to happen, then investors could expect to see a bottom somewhere around 6,300.
Corporate America continues to deliver strong earnings, so, in my opinion, the only way a potential sell-off turns into a bear market is if the weakness in the job market sparks an economic recession. I think the AI industry poses less risk because some of the worst-case scenarios are already priced into individual stocks. Oracle, for example, is down 52% from its all-time high.
In any case, whether a sharp sell-off happens in 2026 or a few years from now, history suggests the S&P 500 is likely to recover to new highs. Therefore, long-term investors might want to treat any weakness as a buying opportunity.
