The AI boom that built the bull market is starting to wobble

Palantir blew past Wall Street expectations in its third quarter — raising its full-year guidance and touting triple-digit growth in its U.S. commercial business. Still, the retail-investor and Wall Street darling fell over 7% before the bell on Tuesday, in line with a broader Nasdaq slide.

Dan Ives of Wedbush credited a “this is as good as it gets” reaction to results as the reason for the pullback. In a larger sense, as the Wall Street Journal noted, “A note of caution is creeping into markets.” Ted Pick, CEO of Morgan Stanley, speaking early Tuesday in Hong Kong, posited that the months-long run-up in major indexes could be making stocks vulnerable—if enthusiasm lapses, there’s nowhere to go but down.

How Palantir’s smash somehow became bad news

The analytics software and defense firm saw revenue surge 63% over last year to nearly $1.2 billion, outperforming analysts’ $1.09 billion estimate. U.S. commercial sales jumped 121%, driving overall U.S. growth of 77%. Operating margins hit 33% on a GAAP basis and 51% adjusted. Palantir also posted over half a billion in free cash flow and a “Rule of 40” score — a key element of company management’s favored scorecard — of 114, far above the 40% benchmark seen as desirable for elite firms in the field.

CEO Alex Karp credited the company’s Artificial Intelligence Platform for “compounding AI leverage” across both its government and corporate clients. Palantir closed a record 204 deals worth at least $1 million, including 53 above $10 million, with total contract value rising 151% to nearly $3 billion.

Wedbush analyst Dan Ives called the quarter “another validation moment for AI demand,” dubbing Palantir the “Messi of AI.” The firm reiterated its Outperform rating and $230 price target. Palantir, Wedbush wrote, remains “at the forefront of the AI revolution.”

Perhaps that’s the reason for the market caution, at least as of Tuesday morning

The selloff in Palantir and the Nasdaq, set to open down about 1.3%, highlights a tense dynamic: America’s entire stock market has arguably become a leveraged bet on AI. The Magnificent 7 tech giants, and now Palantir, account for a majority of S&P 500 earnings growth and capital spending. When AI optimism drives the market higher, it lifts nearly everything. But when it wobbles, even stellar results can’t escape gravity.

With record profits and still-surging U.S. demand, Palantir is proving it can monetize AI. The question now is whether this boom—so central to both markets and the broader economy—can keep compounding without a correction.