The S&P 500 (Index: SPX) rose a half percent over its previous week's close, ending the third trading week of February 2025 at 5,667.56

That small increase marked at least a pause in the ongoing deflation of the AI bubble, which continues to be the biggest story in the U.S. stock market. To emphasize that significance, this week's newstreams carried a story noting that nearly all the AI valuation premium in the Nasdaq 100 has evaporated over the past four weeks.

But is the evaporation of the AI premium a short term noise event or does it mark a regime change for the U.S. stock market? In the latest update of the alternative future chart, we find the trajectory has dropped below the levels consistent with how the dividend futures-based model projects, which corresponds to the possibility the drop in the S&P 500 is the result of a noise event for the market.

The timing of the Federal Reserve's Open Market Committee's interest rate setting meeting on 19 March 2025 however provided a unique opportunity to develop a hypothesis the U.S. stock market is experiencing a regime change, for which the deflation of the AI bubble is a factor. We traced the potential end of the previous market regime to Friday, 21 February 2025, with a new regime then starting from Monday 24 February 2025.

For the dividend futures-based model, what defines a market regime is the value of the model's multiplier. For the previous regime, that multiplier m was set to a value of +1.5, which was effectively a constant from 9 March 2023 through 21 February 2025. For the hypothetical new market regime, we estimate the value of m reset to +4.0 on 24 February 2025. The next chart shows how that change in multiplier, or market regime, affects the dividend futures-based model's projections, in which we assume investors have focused on the upcoming quarter of 2025-Q2 in setting the level of stock prices during the past four weeks.

If the noise event hypothesis is correct, the S&P 500 will likely rebound to higher levels in the weeks ahead. But if the market regime change hypothesis is correct, the index' trajectory will be comparatively lower.

The random onset of new information will play a role in how either scenario will play out. Here are the past week's market-moving headlines.

Monday, 17 March 2025

• Signs and portents for the U.S. economy:
• Oil up 1% as US vows to keep attacking Houthis
• EU tariff on American bourbon was probably a mistake, French PM says
• US natgas prices slide 2% to 2-week low on record output, Waha turns negative
• US natural gas pipeline completions boosted takeaway capacity, EIA says
• Fed minions expected to communicate their expectations for US economy:
• Fed officials prepare to lay down marker on impact of Trump policies
• Bigger trouble, stimulus developing in China:
• China's property slump persists as stimulus struggles to stabilise sector
• China Feb bank lending slows more than expected as US tariffs add to uncertainty
• China looks to boost consumption amid consumer squeeze
• China retail sales pick up as Beijing turns to consumers to ease US trade pressure
• ECB minions get additional problems to think about:
• Rapid euro zone house market recovery raises affordability concerns, ECB says
• Dow, S&P, and Nasdaq closed in the green as the latest FOMC rate decision looms
• US stocks rally as investors weigh economic data, Trump policies

Tuesday, 18 March 2025

• Signs and portents for the U.S. economy:
• Oil prices ease as Ukraine peace talks offset Mideast instability worries
• US manufacturing output accelerates in February
• US housing starts rebound strongly in February
• Fed minions expected to keep more U.S. government issued debt in their holdings:
• Fed watchers see good chance of change in balance sheet drawdown
• Bigger trouble, stimulus developing in China:
• Costco is pressuring suppliers in mainland China to cut prices, FT reports
• Previously, on 6 March 2025….
• Walmart asks China suppliers for price cuts on Trump tariffs, Bloomberg News reports
• ECB minions want Eurozone banks to get more money from them, think EU nations paying more for defense will boost Eurozone economy, Germany plans to spend its way out of recession:
• Euro zone banks must get into habit of tapping ECB for cash, ECB argue
• Europe's increased defence spending to prop up growth, ECB's Rehn says
• What Germany's planned spending spree could mean for the economy
• Wall Street resumes selloff and closes down, as investors await Fed decision

Wednesday, 19 March 2025

• Signs and portents for the U.S. economy:
• Oil rises on US fuel demand, Fed rate decision caps gains
• Fed minions hold U.S. interest rates steady, as expected:
• Fed policymakers project two rate cuts this year, some see fewer
• Tariffs to delay inflation progress, too soon to gauge impact, Fed's Powell says
• Trump says Fed would be better off cutting rates as tariffs 'transition' into economy
• Fed says it will slow balance sheet runoff process
• Bigger trouble, stimulus developing in China:
• China's youth jobless rate rises to 16.9% in February
• China holds benchmark lending rates steady as expected
• Hong Kong central bank keeps base rate unchanged as Fed holds steady
• BOJ minions to delay rate hikes until later in 2025, say Japan's economy is growing:
• BOJ keeps interest rates steady as widely expected
• Japan says economy recovering, but flags risks from Trump trade policies
• U.S. stocks close off session highs but notch strong finish after dovish Fed
• Wall Street rallies after Fed keeps rates unchanged
• Almost all top 10 S&P holdings are in correction from their 52-week highs

Thursday, 20 March 2025

• Signs and portents for the U.S. economy:
• Oil prices settle $1 higher after US issues new Iran-related sanctions
• Trump’s Tariffs: A timeline of the ongoing global trade tension
• Is the U.S. heading for a recession?
• US existing home sales unexpectedly rise in February
• Market reacts to Fed minions' inaction:
• Trading Day: No direction Jerome
• Bigger trouble, stimulus developing in China:
• China urged to ramp up support for services consumption
• China's restaurants race to the bottom in deflation-hit economy
• Bigger trouble developing in Japan, pressure building for BOJ minions to hike rates:
• Japan's core inflation hits 3% in February, keeps alive BOJ rate-hike bets
• Most central banks following the Fed's example of inaction:
• Central banks turn more cautious on rate cuts
• Bank of England keeps rates on hold, warns against assumptions for cuts in face of uncertainty
• South Africa pauses rate cuts as trade and budget risks overshadow low inflation
• Swiss National Bank flags economic uncertainty after latest rate cut
• Sweden's Riksbank holds rate but is ready to act, highlights global risks
• Taiwan central bank holds rate as expected, sees little impact from US tariffs
• ECB minions think Eurozone is too dependent on U.S., think trade war with U.S. would be costly but don't think tariffs will cause inflation:
• Europe's dependence on U.S. payment firms leave it open to coercion, ECB's Lane says
• ECB to discuss defence spending support in the future, Holzmann says
• EU's necessary defence spending boost makes inflation harder to predict, ECB's Knot says
• ECB's Villeroy: Limitless defence spending should be out of the question
• ECB's Lagarde spells out cost of trade war with US
• ECB's Centeno: trade war unlikely to spur inflation
• U.S. stocks end lower as investors gear up for $4.5T options test
• Nearly all the AI valuation premium in the Nasdaq 100 has evaporated
• Gold steadies near record highs on Fed rate cut hints

Friday, 21 March 2025

• Signs and portents for the U.S. economy:
• Oil prices rise for second consecutive week on expected tighter supply
• Fed minions lost less money in 2024, want to be more cautious in 2025:
• Fed posts smaller loss on operations in 2024
• Fed officials back cautious policy approach in light of economic uncertainty
• Fed's Waller says no need to slow balance sheet drawdown at this time
• Bigger inflation developing in Japan:
• Japanese firms agree to 5.4% wage hike, top union group's second estimate shows
• ECB minions getting excited to cut Eurozone interest rates again:
• Everything points towards ECB rate cut in April, Stournaras says
• Wall Street ekes out gain, halts four-week losing run
• Wall St ends higher, dollar rises as Trump signals tariff respite

The CME Group's FedWatch Tool's projections are unchanged despite the Fed's 'cautious' statements after its 19 March 2025 interest rate setting meeting that left the Federal Funds Rate unchanged, as expected. The FedWatch Tool projects the Fed will resume cutting rates with a quarter point rate reduction when Fed meets on 18 June (2025-Q2). The FedWatch tool also anticipates additional quarter point rate cuts at 12-week intervals in the second half of 2025, coinciding with the Fed's FOMC meetings on 18 June (2025-Q2), and 17 September (2025-Q3) and 10 December (2025-Q4).

The Atlanta Fed's GDPNow tool's projection of what real GDP growth will be in 2025-Q1 improved to -1.8% from last week's projection of -2.4%. Even so, the GDPNow estimate is still believed to be sending a false signal given very high imports of gold to the U.S., which have shown up as imports in trade data, but which have not yet been updated in inventory data tracked by the GDPNow tool. Forecasts of GDP in 2025-Q1 will be revised significantly higher after accounting for the imported gold rush in its 26 March 2025 update.

Image credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a Wall Street bull who is happy the stock market had a good week after four losing weeks".