Investors should watch for these 3 signs that the bull market in stocks is in danger

• The AI-driven bull market faces three risks investors should be aware of, BCA Research says.

• A slowdown in capex is among the top risks that would signal the rally is set to reverse.

• The firm said it would remain overweight on stocks and bonds for the time being.

The bull market in stocks looks fine — for now. But there are a handful of signs investors should be watching for that could suggest the yearslong run-up in stock prices is set for a reversal, according to BCA Research.

That moment hasn’t come yet, Juan Manuel Correa, chief strategist at the firm, wrote in a note to clients on Monday. But the market is still facing risks that make the rally vulnerable, he said.

“So far, we do not see any obvious red flags,” Correa said, adding that BCA still remained overweight on stocks and bonds in its portfolio. “We are certainly keeping a close eye on all the risks that could derail our view.”

Here are three warning signs the firm thinks could signal the bull market is in danger:

Capital expenditures related to AI have been one of the main drivers of the stock rally in recent years, Correa said. That leaves the market vulnerable to any pullback in capex, he suggested.

Since 2023, mega-cap tech firms have announced increasingly ambitious plans to spend more on AI. Amazon, Meta, Microsoft, Alphabet, and Apple are on track to spend more than $349 billion on capex this year, according to Business Insider’s latest analysis of company statements.

There are some signs that investors are growing antsy over how much tech firms are spending, which could lead capex spending to be dialed back in the future, Correa speculated. He pointed to Meta stock’s post-earnings drop after its most recent earnings report as investors digested the company’s plans to double-down on AI spend.

“We believe that a significant slowdown in AI capex would not only be catastrophic for equity markets, but could also cause a recession in the United States,” he said. “There is an argument to be made that equity investors could once again bring capital discipline to these tech giants — leading to a curtailment in capex and a sudden stop to the AI cycle.”

There’s a risk that some of the largest players in the AI space could see their cash conversion ratios decline, Correa suggested. That refers to the rate at which a company can turn its investments and inventory into cash.

As a comparison, Correa pointed to Lucent, a telecom stock that boomed in the late 1990s. Like Nvidia, the firm was considered to be the “hardware backbone” of the dot-com craze and was an aggressive provider of vendor financing in the years before the bubble popped, he said.

But the company eventually stumbled after its customers ran out of cash and were unable to pay for their commitments, he added, which led Lucent’s cash flow to deteriorate relative to sales.

Nvidia’s current finances don’t look anything like what Lucent’s were prior to the bursting of the dot-com bubble, Correa said.

“However, investors should be cognizant that a deterioration in cash conversion by Nvidia could spell trouble as its customer base increasingly shifts to AI private companies that lack the robust balance sheets of the hyperscalers,” he added.

Broader weakness in the US economy could also spell trouble for the bull case for stocks, Correa said.

He added that the firm was eyeing a few private economic indicators to gauge the strength of the economy during the government shutdown:

• State-level weekly jobless claims

• The Chicago Fed Real Time Unemployment Rate Forecast

• Bloomberg’s Real Control Group Retail Sales

BCA Research said that there wasn’t enough evidence yet that the key pillars of the bull market have deteriorated.

More forecasters have been questioning the trajectory of the market in recent months as talk about a stock bubble grows louder. Doubts have surfaced regarding the sustainability of the AI trade and the billions that tech firms have poured into the technology, though monetization plans for some companies remain unclear.

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