Testing the AI story

Not that AI has been out of the market spotlight much in recent months, but Tuesday’s tech pullback made sure it was front and center.

Central to the story was the sell-off in AI-centric data company Palantir (PLTR), which fell 8% on Tuesday (and another 5% intraday on Wednesday) in the wake of the company’s Q3 earnings announcement:

Given that Palantir (modestly) topped its earnings and revenue estimates, and also offered bullish forward guidance, Tuesday’s decline was likely a head-scratching event for many observers.

A few factors may have been at work. First, while PLTR’s Q3 performance topped estimates, it may have also come up short of the so-called “whisper numbers”—what the Street was really expecting to see. In short, the company beat its numbers, but perhaps not by enough to satisfy investors whose expectations may have been inflated by PLTR’s outperformance over the past year or so. (Reports that a high-profile investor had taken short positions in PLTR probably didn’t improve sentiment.)

The stock, which began trading in late 2020, spent the vast majority of its first four years below $30, falling as low as $5.84 in January 2023. The stock appeared to turn a corner in early August 2024—rebounding from a pullback and, eventually, rallying as much as 760% (as of its record close on Monday of this week).

And that’s the other major factor—the idea that the “AI rally” has gotten ahead of itself, stretching valuations in some stocks beyond reason, and drawing parallels to the dot-com boom and bust that unfolded a quarter-century ago.

Has the AI “story” become overheated? Possibly, but the heat is probably not evenly distributed. In the long run, a rising AI tide will not necessarily lift all boats—some companies may (over)invest in AI and fail to prosper, or just plain fail. Certain companies, however, may have an advantage.

Daniel Skelly, head of Morgan Stanley Wealth Management Market Research & Strategy Team, has noted that one of the main reasons “AI bubble” talk is misplaced is that the leading AI spenders continue to enjoy increased earnings power. They aren’t comparable to dot-com companies that didn’t have earnings, or even viable business models.¹ In other words, in the AI space, the big may be positioned to get bigger.

For their part, Morgan Stanley & Co. strategists noted in their post-earnings analysis that “it is hard to find a better fundamental story in software than Palantir.”²

But as the past two days show, even strongest rallies have setbacks. Palantir’s could certainly deepen. The stock’s current pullback is testing a short-term technical level—the breakout of the September-October trading range. Since PLTR embarked on its current uptrend in the second half of 2024, its post-earnings performance has followed two basic paths, represented in the chart by the moves that unfolded in May and August: An immediate rally that is reversed after some initial upside follow-through (after which the uptrend resumes), or an immediate sell-off is reversed in a few days.

If the former consolidation provides support, traders may have more confidence about the stock’s ability to repeat the latter pattern, at least in the near term.

Today’s numbers include (all times ET): Challenger Job-Cut Report (7:30 a.m.), productivity and costs (8:30 a.m.), preliminary wholesale inventories (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Airbnb (ABNB), ConocoPhillips (COP), Dropbox (DBX), Datadog (DDOG), MP Materials (MP), Moderna (MRNA), Ralph Lauren (RL), Rockwell Automation (ROK), NuScale Power (SMR), SanDisk (SNDK), Tapestry (TPR), Ubiquiti (UI), USA Rare Earth (USAR), Block (XYZ).

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¹ Bloomberg. Wall Street Rally Stalls Amid Signs of Overheating: Markets Wrap. 10/9/25.
² MorganStanley.com. 3Q25 Results—Emerging as the Enterprise AI Standard. 11/4/25.