All that's new is well-forgotten old. Before the Middle East conflict broke out, the US equity market was already choppy on concerns that companies' AI spending was bloated and that they wouldn't be able to generate strong profits — that AI would bankrupt certain issuers and entire sectors, notably software. Fears arose that a new technology bubble was inflating, reminiscent of the dot-com crash. Once geopolitics became less the focus, the S&P 500 returned to those old ailments.

The broad index has gained roughly 18% since the start of April and is set for its best monthly performance since 2002. Much of the credit goes to impressive corporate results from US companies, above all those in the technology sector.

Monthly S&P 500 performance

Wall Street analysts estimate that EPS for the Big Tech group will jump by nearly 41% in the first quarter, roughly twice the expected gain for the second-ranked materials sector.

It is no surprise that the S&P 500 has effectively looked past the Middle East conflict and is focused on one thing — AI's ability to deliver exceptional financial results.

Expected EPS dynamics by S&P 500 sector

However, as soon as something goes wrong, the broad index faces a sell-off. The pullback was triggered by a Wall Street Journal report that ChatGPT maker OpenAI missed revenue and user growth forecasts. That news immediately knocked related stocks, including Oracle, CoreWeave, SoftBank, and others, as those firms had provided financing to OpenAI. Problems at the ChatGPT provider reminded investors of prior troubles and prompted selling across the S&P 500.

Goldman Sachs says a pullback in the broad index is due. That view reflects both overextended bullish positioning and a shift by key institutional investors from buyers to sellers. Systematic funds, which injected roughly $53 billion into the S&P 500 in April, stopped buying at the end of the month. Still, Goldman remains constructive on US equities and argues that any correction would present an excellent opportunity to build long exposure.

Bad news from OpenAI was a warning shot ahead of earnings from the four companies in the Magnificent Eight. If they disappoint, the pullback could deepen. Investors are also wary of potential hawkish signals from the Fed after the April FOMC meeting.

Technically, the S&P 500 tested fair value at 7,120 on the daily chart. The support level held, and bulls can return to buying in case of a move above 7,165. Conversely, a drop below 7,110 would be a trigger for selling.