Is it really bad? The S&P 500 was shocked to see a rare warning signal in 43 years. It has happened 5 times out of 6 times in history.

The stock market volatility has intensified, and investors should operate with caution.

There are concerns about the cooling of the AI ​​investment boom. U.S. technology stocks have been increasingly volatile recently, and some AI concept stocks have been sold by investors. The market has begun to worry about whether huge investments can bring expected returns. Now, the S&P 500 Index has given off another warning that has been rare in 43 years. It is expected that the price-to-earnings ratio will fall sharply by 4.4 points within a year. Of the 6 similar cases in history, 5 were accompanied by economic recession or bear market. And one year after the signal appeared, the median maximum retracement range of the index was about 18%. The U.S. stock market may face greater challenges in the future.

"Business Insider" reported that market research firm Ned Davis Research (NDR) pointed out that the S&P 500 index's expected price-to-earnings ratio has experienced a rare sharp decline. NDR U.S. chief strategist Ed Clissold pointed out in a report released on Wednesday that the S&P 500's expected price-to-earnings ratio fell 4.4 points in the year to the end of October this year and is currently down to 18.8 times, which is far lower than last year's 23.2 times.

Clissold said declines of this magnitude were rare, having only occurred six times since 1983. In five of these cases, the S&P 500 was in an "Echo Bear Market," a bear market that re-emerged within a few years of the end of a previous recession, or when the U.S. economy was already in recession.

Past cases include the bursting of the dot-com bubble in 2001 and the financial tsunami in 2008, when the U.S. economy fell into recession; in 2022, it was in the early stages of economic expansion, but the stock market still experienced a bear market. The only exception was the case of 1988, when the U.S. economy was still expanding but entered its next recession about 23 months later.

It is worth noting that after a sharp decline in the expected price-to-earnings ratio, the stock market is often accompanied by violent fluctuations. Although in 5 of the past 6 cases, the S&P 500 index still rose in the next year, the median maximum retracement range during the period was about 18%, which means that even if it finally closed up, investors may still experience considerable book losses.

NDR strategist Clissold pointed out that this year's situation is quite special. Investors have begun to revise down their expectations for the continued development of the AI ​​craze, thus lowering the expected price-to-earnings ratio of the S&P 500 index. The decline has even reached a level that usually only occurred during economic recessions or bear markets in the past. He said that if corporate profit growth slows down next year, the current market skepticism may be able to cushion part of the impact; however, if the cooling of the AI ​​industry further triggers an economic recession, the recent decline in the price-to-earnings ratio may still not be able to avoid a sharp correction in the stock market.

This warning also comes at a time when the prospects for AI investment have attracted much attention. In the weeks leading up to the U.S. midterm elections, technology stocks have been extremely volatile. After the election results were announced, investors continued to sell off some technology stocks on Wednesday. The market is worried that Democratic lawmakers may hinder the construction of data centers, which is currently one of the most important investment directions for large cloud service companies.