U.S. Equity Market Outlook: A Developing Bear Market

By Victor Sperandeo with the Curmudgeon

Introduction:

Victor believes that the S&P 500 and Nasdaq-100 have entered the early stages of a bear market. This is a forward-looking assessment—not a confirmation. The combination of failed technical breakouts, technology-sector weakness, persistent energy inflation and restrictive monetary policy warrants a defensive posture.

The bear market thesis has a clear invalidation point: a sustained recovery above the early-October closing highs of both indexes would undermine the bearish case. For the S&P 500, the relevant reference is its October 6th record close of 7,818.93. For the Nasdaq-100, the closing high of 31,224.7 was also on October 6th. Those levels should anchor risk management.

Market Action Supports a Defensive Position:

Recent price action strengthens the bearish case. The S&P 500’s record breakout reversed, and the index lost approximately 2% in the week ended October 16th. The Nasdaq-100 declined approximately 5.5%, while the PHLX Semiconductor Index fell 11.4%. This pronounced deterioration in technology and semiconductor stock leadership raises the risk that the decline extends beyond a short-lived pullback.

Market participation has also weakened beneath the headline records. On October 6, Nasdaq-listed stocks registered 61 new 52-week highs against 182 new lows, even as the Nasdaq Composite reached a record close. That divergence suggests that index strength was masking weakness across a broader group of stocks. These figures apply to Nasdaq-listed securities, not specifically to Nasdaq-100 constituents.

Failed breakouts, weakening participation and sharp losses among former market leaders support a developing bear-market thesis. They do not, by themselves, establish that a prolonged decline is inevitable.

The Fed Faces an Unfavorable Inflation-Growth Tradeoff:

The Federal Reserve raised its policy-rate target by 25 basis points (bps) on September 16h, bringing the federal funds target range to 3.75%–4.00%. Victor's concern is that further tightening of monetary policy into an energy-supply disruption risks weakening demand without resolving the underlying supply constraint.

Higher interest rates cannot directly restore disrupted oil production or transportation. They can restrain demand, but the economic cost may be slower consumption, weaker investment and pressure on corporate earnings. That is the potential policy error: attempting to contain supply-driven inflation through measures that further weaken economic activity.

Our expectation is that the Fed will leave rates unchanged at its October 27–28th meeting, just six days before the U.S. elections. The Fed has NEVER raised rates for only the second time in the month before any U.S. election. However, Fed Funds futures market forecasts a 99.9% probability of one or more rate hikes by October 27, 2027. There's a 79.4% probability that the Fed Funds rate will be between 450-475 bps to 5.50-5.75 bps (it's currently at 375-400bps) at that time.

Inflation Watch: Unlike the Fed's 2021 comments, inflation is NOT "transitory." The BLS September 2026 CPI release this week revealed a 3.7% YoY increase. Also, the Federal Reserve Bank of Cleveland released long-term estimates of expected inflation this week which told a very concerning story. Elevated inflation expectations are so firmly established that the public expects price pressures to remain above the Fed’s 2% target over the next decade! This is an important alarm bell for the Fed as entrenched inflation expectations can make price increases significantly more difficult to bring down.

The most difficult question for the Fed is whether inflation can moderate without a substantial deterioration in growth caused by future rate hikes.

Dimon’s Comments Reinforce Caution:

In JPMorgan Chase’s October 13th earnings release, Chairman and CEO Jamie Dimon said:

“The U.S. economy continued to be fueled by strong business investment and ongoing consumer spending. However, large fiscal deficits, sticky inflation, elevated asset prices, rising interest rates and geopolitical conditions continue to shift under the surface. These forces may be manageable, but we remain prepared for a wide range of outcomes.”

Dimon acknowledged continued economic resilience while highlighting risks that could undermine it. His comments were not an explicit recession forecast, a declaration that the economy was already weak or evidence that the Fed had recognized a policy mistake.

The investment implication is more measured: strong current spending does not eliminate the risks posed by expensive assets, elevated financing costs and geopolitical disruption. There is also insufficient evidence to attribute a particular intraday acceleration in selling to Dimon’s statement.

Energy Remains a Critical Risk:

Victor's working assumption is that prolonged geopolitical disruption (Iran war & Houthis attacks on Saudi Arabia) could keep crude oil above the $75–$80-per-barrel range and sustain upward pressure on refined-product prices. That range is a conditional scenario, not a guaranteed price floor.

Amid geopolitical tensions, WTI crude oil rose approximately 10% in the week ending October 16th to $101.41 a barrel; Brent crude oil rose 4.1% $109.86 per barrel. These price increases reinforces the risk that energy inflation remains elevated even as other parts of the economy weaken.

Victor's energy outlook is that prolonged conflict and supply disruptions could keep crude oil above $75–$80 per barrel for an extended period. He remains skeptical that the Trump administration’s approach will deliver a durable resolution. Further escalation could deepen shortages and sustain upward pressure on crude oil and refined-product prices.

The principal concern is lasting damage to energy production, export infrastructure and transportation routes across major energy-producing regions. Where infrastructure is severely damaged or investment is deferred, restoring oil supply could take years—even after hostilities end.

Higher interest rates cannot repair energy infrastructure or reopen disrupted shipping routes. They can suppress demand, but potentially at the cost of weaker growth. Resolving the underlying supply shock requires de-escalation, secure transportation and restored oil production.

Leverage Could Amplify Losses, but It Is Not in M2:

The money-supply argument requires a distinction. M2 comprises currency, qualifying deposits and retail money-market fund balances. Margin debt and corporate borrowing are not themselves components of M2, so increases in either of them should not be interpreted as “money printing.” We leave that to the Fed and the U.S. Treasury department.

The relevant bearish stock market concern is extreme leverage - margin debt, leveraged ETFs, call options, etc. Borrowing can support asset purchases during an advance, while losses can force leveraged investors to reduce exposure during a decline.

Bank of America and Goldman Sachs each reported this week that their securities-based loans, which include some margin debt as well as other types of loans, have seen double-digit growth in the 12 months through September 30th. Morgan Stanley reported that its margin book grew by more than 10%. Charles Schwab said Thursday that margin loan balances on its books had swelled to roughly $188 billion in the third quarter, nearly doubling year over year.

Have a look at this chart which shows exponentially increasing margin borrowing at ~ $1.5T as of September 2026 FINRA reporting.

The following table (from Perplexity.ai) compares nominal margin borrowing—not inflation-adjusted purchasing power or leverage relative to equity values.

Historical episode	Margin-debt peak	September 2026 relative to that peak
Dot-com bubble, March 2000	Approximately $300 billion	About 4.9 times as large
Pre-financial crisis, July 2007	Approximately $416 billion	About 3.6 times as large
Pandemic-era speculation, October 2021	$935.9 billion	About 58% higher
Current cycle’s record, June 2026	$1.502 trillion	About 1.5% lower

Historical figures come from reporting based on FINRA’s series, with October 2021 also documented in FINRA’s historical data; comparisons use the September 2026 latest balance.

It's important to realize that today's speculators and investors can obtain substantial stock-market leverage without taking out a conventional margin loan. Zero-day options, conventional call options, 2X and 3X leveraged ETFs, stock-index futures, and options on futures make FINRA’s margin-debt total an incomplete measure of potential market instability.

In conclusion, leverage should be treated as a potential amplifier of ongoing market weakness—not proof that a forced-liquidation cycle has begun.

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The AI Dept Bomb:

Debt-financed AI investment is a separate issue: the risk depends on financing costs, maturities and the cash flows available to service that debt. We previously reported:

· 2026 Debt Issuance: Projected between $220 billion and $250+ billion for major US hyperscalers (Alphabet / Google, Amazon, Meta, Microsoft, and Oracle), with broader AI-related market debt reaching up to $570 billion.

· 2027 Forecast: Goldman Sachs projects direct hyperscaler debt issuance to nearly double to around $400 billion (Jeff Pu estimates $419 billion) as companies finance over a third of their infrastructure needs.

The huge risk for the economy and financial markets is that most of that debt will never be repaid, leading to an AI crash.

Trading Suggestions and Invalidation Levels:

The proposed positioning reflects the bearish equity thesis, but each trade requires an explicit risk limit:

Gold: Maintain a long bias, with the proposed sell-stop at 4,025. The instrument, contract month and quotation convention must be specified before that level becomes an executable instruction.

Heating oil: Maintain a bullish bias only within a defined position-size and maximum-loss framework. An unrestricted “long with no stop” instruction leaves the downside undefined.

S&P 500 and Nasdaq-100: Maintain a bearish trading bias while the indices remain below their verified early-October closing peaks. Know in advance whether an exit requires an intraday breach or a closing-price confirmation of the October highs. Translate index thresholds into the actual instrument being traded.

Two-year U.S. Treasury-note futures: Consider a long position after a two-session pullback, with a stop below the relevant futures-price low. This trade depends on Treasury prices rising and yields falling.

Note that an equity decline alone does not establish that outcome. The 2-year Treasury long position must remain distinct from the bear market equity thesis. If persistent inflation keeps policy expectations elevated, a falling stock market may not deliver the anticipated Treasury rally. The intended bullish note-futures position anticipates lower yields—not a bottom in interest rates.

The Curmudgeon has been buying newly auctioned 2-Year U.S. Treasury notes via the Treasury Direct website almost every month. He has also bought T-bills, 3-year, 5-year, and 7-year Treasury notes at that website.

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Conclusions:

The bearish equity case rests on the interaction of deteriorating market leadership and breadth, persistent energy inflation, hyperscaler AI risks, and a "higher for longer" tight monetary policy (to reduce inflation). Together, these forces threaten both corporate earnings and equity valuations, increasing the risk that the current decline develops into a sustained bear market rather than a routine 10% correction.

Ultra-high margin debt is a key risk for equities: falling prices can trigger margin calls and forced selling, turning a pullback into a self-reinforcing decline. Combined with persistent energy inflation and restrictive monetary policy, that leverage strengthens the bear-market case. Keep exposure controlled and exit bearish positions if the indices sustainably reclaim their early-October highs.

The relevant variables to lower high energy prices are: the duration of the Middle East conflicts, physical supply availability and transportation security. A durable restoration of the disrupted oil supply would address the shock directly. Higher short term interest rates won't resolve this problem and will surely result in economic weakness.

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End Note - Investment, Speculation and Gambling:

Investing: is buying an asset that will appreciate over lengthy periods of time. It usually has a yield or a dividend.

Speculation: is buying an asset expecting quick "price appreciation," where the risk-reward, likelihood of success, and the odds are in the favor of the buyer.

Gambling: is making a “wager” when the odds of success are NOT in the bettors’ favor, e.g. at a casino or highly leveraged equity plays.

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Wishing you good health, success, and good luck. Till next time………

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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