Decoding the S&P 500: When Human Sentiment Meets Artificial Intelligence

In a recent interview on Thoughtful Money, famed economist David Rosenberg stated that the percentage of the U.S. economy currently expanding—when weighted by population—is only 18%. In other words, 82% of the U.S. economy is flat or in contraction. To make this statistic even more startling, he noted that just six weeks ago, over 40% of the economy was expanding, signaling a rapid deterioration in growth. 

The last two times we saw less than one-fifth of the U.S. economy expanding was the summer of 2020 and the winter of 2009—two of the most difficult periods for the American economy in decades. Yet today, the S&P 500, NASDAQ, Dow Jones Industrial Average are at all-time highs, while credit spreads remain near historic lows. 

The reason lies in the remarkable fact that the small portion of the economy that is still expanding is tied to artificial intelligence, which continues to show no signs of slowing down. This is largely driven by a handful of hyperscalers, who are spending hundreds of billions of dollars annually on AI data center capital expenditures and that spending continues to accelerate. In fact, analyst estimates have consistently failed to keep pace with the actual rate of AI infrastructure investment. A year ago, expectations for Big Tech capex stood at roughly $250 billion. Morgan Stanley later projected $300 billion for 2025, yet that number has already risen to $365 billion with one quarter left to go. 

Though it may seem overly simplistic, the reality is that if hyperscale’s capex continues to grow, it is unlikely that the U.S. economy will fall into a recession—even with more than 82% of its sectors already contracting. 

To say that this is an unparalleled economic backdrop would be an understatement. Each week, a new thesis emerges, warning of an AI bubble, citing historic valuations and drawing parallels to the dotcom bust. Yet the market—and Big Tech capex—continues to march higher, leaving many investors unsure of what comes next. 

While the current environment is unprecedented, what never changes is human sentiment. Arguably the most underestimated force driving markets, sentiment remains something economics has no meaningful way to measure. Only through technical analysis can we quantify market psychology and define risk parameters that keep us out of trouble while allowing us to participate in the uptrend. 

In this report, we will analyze the sentiment pattern shaping the current bull cycle. We will then place that pattern within the context of the larger secular bull market to better understand when the music might stop—and how we plan to potentially navigate this environment when it does happen.

Defining the End Game: Decoding the S&P 500's Long-Term Elliott Wave Count 

On October 13th, 2022, the S&P 500 bottomed, after selling off approximately 25% in just under eight months. Since this low, the market is up around 95% in a new bull market, as investors continue to wonder how much further this new bull cycle can go. Using technical analysis, we can get a rough idea of how much longer this cycle can continue by analyzing the pattern of this bull cycle, and how it fits into the context of the larger pattern in play. 

What is clear about the current bull cycle is that the pattern is what’s called a diagonal. A diagonal is a 5-wave pattern where each of the sub-waves is a series of 3-wave patterns. The primary characteristic of this pattern is that the explosive 3rd wave fails to take off, and the 4th wave tends to be very deep, retracing close to, or into 1st wave territory.

Elliott Wave Ending Diagonal: A 5-wave motive pattern where each sub-wave is a 3-wave correction, signaling trend exhaustion. 

Image by I/O Fund 

This is a very distinct and common pattern that we see in capital markets. What is unique about the current diagonal pattern is its size. It is rare to see a multi-year diagonal pattern in play, which is exactly what the market is tracing in real-time.

S&P 500 Index (SPX) Chart: Large Elliott Wave Ending Diagonal formation, showing the market currently in its final 5th wave with potential continuation to 2026 targets (6820-7600). 

Image by I/O Fund 

As you can see above, the S&P 500 is likely in the final stages of a multi-year diagonal pattern. Note the overlapping swings in both directions, as well as the very deep 4th wave drop in March of 2025. This puts us squarely in the 5th wave of this pattern. Based on the current price action, the below counts best projects where this diagonal can go: 

• Green Count –The move off the April low of this year is the A wave within the final 5th wave. We should see some type of B wave correction in the coming weeks to months, followed by a final, multi-month blow off swing into 2026. This will complete the diagonal pattern, setting the market up for a period of volatility.
• Blue Count – We are in the final swings of the 5th wave. As long as 6345 and then 6205 holds on any further weakness, we should see a continued push higher into Q4 with target between 6820 – 7280. 

The green count is further supported by the NASDAQ-100. It too appears to be tracing a diagonal pattern.  

NASDAQ-100 (QQQ) Chart: Multi-Year Ending Diagonal pattern (Elliott Wave Theory) in its final stages, projecting a major bull cycle end in 2026. 

Image by I/O Fund 

While we do have a full 5 waves in place, which is enough to complete the pattern in full, note the symmetry of this final 5th wave compared to the 1st wave. To fill out the pattern completely, the NASDAQ-100 suggests a correction and continuation into 2026.

Secular Bear Warning: The Market Reality After an Ending Diagonal Completes 

Another key element of diagonal patterns is their placement within a trend. They can only show up in two places: (1) a leading diagonal is the 1st move higher within a larger trend that is starting. In other words, it is wave 1 in a newly developing 5-wave pattern; (2) an ending diagonal is the final move within a completing 5-wave pattern. In other words, it is wave 5 within a larger 5 wave pattern that is close to completion.

This begs the question: if the current bull cycle we are in is the start of a much larger 5 wave pattern, or the end move within a larger 5 wave pattern? If we zoom out on the larger pattern in play, it appears to be an ending diagonal within the secular bull market that started in 2009.

S&P 500 (SPX) Long-Term Chart: The I/O Fund's Analysis of the Secular Bull Market (March 2009) in its Final 5th Elliott Wave. 

Image by I/O Fund 

The above monthly chart of the S&P 500 shows a very clear and distinct secular bull market that took the shape of a 5-wave uptrend. Note how the bull market in 2017 was marked with peak momentum, followed by the vertical move after the COVID low. We have continued to see the market make new highs on weaker momentum, which is characteristic of 5th waves.  

Most importantly, though the bear market in 2022 was difficult, as you can see on the chart above, it was merely a bump in the road of the larger bull trend. In short, it was not deep enough, nor long enough to constitute a reasonable consolidation of the secular bull market that started in 2009. In other words, if one were to say the 5-wave pattern, and secular bull market, ended at the start of 2022, we would need to see a consolidation/retrace that matches the length of the uptrend in both price and time. This does not meet that criteria, which tells me 2022 was a correction within the on-going secular bull market.

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This leads me to believe that the diagonal pattern we are in is an ending diagonal, which  once completes, will lead to a period of volatility and consolidation that most investors are not prepared for. 

What this suggests is that after the secular bull market completes, we will enter a very normal period of consolidation, known as a secular bear market. Though this may seem impossible, as we have been trained since 2010 to stay long and buy every dip, it is a very normal part of investing. In fact, since 1900, the market has spent 56% of the time in a consolidation period.

S&P 500 Historical Chart: Analyzing Consolidation Periods Since 1900. Market spends over half its time (56%) in sideways/bearish phases following extended Secular Bull Markets. 

Image by I/O Fund 

Furthermore, the average secular bull market since 1900 has lasted for an average 11.3 years and returns 774%. The current secular bull market has lasted for 16.6 years and returned just over 918%, well over the average, and the 2nd most profitable secular bull market in the last 125 years.

Historical S&P 500 Bull Markets: Analysis of duration and gain, highlighting the current 2009-starting secular bull market as the second longest and most profitable in modern history. 

Image by I/O Fund 

The below analyzes the last secular bear market between 2000 – 2009 to gain a better understanding of how to best participate in stocks in extended periods of volatility. Like Apple at the turn of the century, there are similar correlations with Nvidia, which we reveal in our long-term chart below.  

Subscribe for Free Below to see how to best survive an extended period of volatility:  

• Understand why Apple’s lesson, not Cisco, was the most important of the 2000 – 2003 bear market. 
• Get a glimpse into how we plan to navigate challenging times if they manifest.  
• Get access to the big picture of Nvidia’s potential path higher, and why it appears to be in a secular uptrend for many years to come, unlike the S&P 500. 

The I/O Fund plans to approach the current market with a well-defined exit strategy. Learn below the strategies we are eyeing should volatility increase.