Sharp swings in financial markets have left investors reeling in recent weeks, as questions about a potential artificial intelligence (AI) bubble collide with uncertainty surrounding the Federal Reserve’s next interest rate decision.
The AI trade has been booming for nearly three years since the release of ChatGPT, but some are beginning to wonder how long this can last before shareholders get antsy for returns on firms’ massive multibillion-dollar investments.
Meanwhile, investors are searching for clues about whether the Fed will cut rates next month amid a murky economic picture, complicated by missing data from the government shutdown.
The result has been significant market volatility over the past month, with a key volatility index reaching its highest level since April, when President Trump unveiled his wide-ranging tariff regime.
“There’s just a lot of uncertainty and conflicting signals in the market that are creating that volatility,” Catalyst Funds co-founder David Miller told The Hill.
The Dow Jones Industrial Average, Nasdaq composite and S&P 500 index closed with slight gains Wednesday as markets closed ahead of Thanksgiving, marking their fourth straight day in the green. The four-day rally pushed all three major stock indexes back above their levels one month ago, before a steep selloff driven by AI bubble fears.
Central to the recent swings are growing concerns about the future of the AI boom. Major players, like Nvidia, Microsoft, Meta and Oracle, have seen their stock prices slide since early November amid fears that the AI trade has been overhyped. Apple and Google have notably bucked this trend.
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As these companies continue to commit billions of dollars to AI investments, questions have emerged about if and when they will see a return. The increasingly circular nature of deals between key AI firms and the emergence of debt financing is also spooking investors, who are quick to draw comparisons to the dot-com bubble.
This has weighed on the broader market, which is highly dependent on major tech stocks. The contingent of companies known as the Magnificent Seven — Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla — represent about a third of the S&P 500’s market capitalization.
“We’ve never been in a situation where there’s been this much market concentration among the largest stocks, and I don’t recall a situation where one industry so dominated the economy and the stock market at the same time,” said Steve Sosnick, chief strategist at Interactive Brokers.
“[This] is why the markets are so sensitive to even the whisper that AI spending might take a breather, or the pace of the spending might slow from breathtaking to merely rapid,” he added.
Several high-profile trades have reinforced these fears. Investor Michael Burry — known for his early recognition of the subprime mortgage crisis that precipitated the 2008 financial crisis and ultimately became the basis for “The Big Short” — disclosed earlier this month that his hedge firm had taken bets against Nvidia and Palantir.
Venture capitalist Peter Thiel’s hedge fund also revealed in mid-November that it had sold off its entire stake in Nvidia.
“We got a pretty decent sell-off, and then we got a violent rally back,” Nancy Tengler, CEO of Laffer Tengler Investments, said of the recent short positions. “But I think if you step away from it and you say, ‘What has changed in the last month,’ from our perspective as long-term fundamental investors, nothing has changed.”
Tengler underscored that key AI players have continued to post strong earnings and guidance. Nvidia easily beat investor expectations for the third quarter when it reported earnings last week, with revenue up 62 percent year-over-year.
The solid fundamentals of the tech firms leading the market have helped allay concerns about a potential AI bubble. While some companies are financing their AI investments with debt, many are using free cash flow — a key distinction from the internet boom in the late 1990s.
“You can’t deny that the AI trade is having some effect on markets right now,” said Callie Cox, chief market strategist at Ritholtz Wealth Management. “These Big Tech stocks are some of the biggest stocks on the market. And when news comes across, as has frequently happened over the past few weeks, then changes in these stocks are going to make waves for the rest of the market.”
However, she added, “When you dig down, the heart of the conflict within investors is around the economy. How strong is the economy? We’ve been walking in the dark for two months now on the answer to that question. And how does the Fed view its role in the context of where this economy sits?”
The Fed is set to meet in early December for its final meeting of the year, where it will consider whether to cut interest rates again after earlier reductions in September and October.
Expectations about the central bank’s decision have shifted dramatically over the past month amid efforts to parse new data after a lengthy government shutdown delayed key releases. In late October, traders saw a greater than 90 percent chance of a December rate cut, according to the CME FedWatch tool.
However, by mid-November, this had fallen steeply to 30 percent, as inflation ticked up to 3 percent in September and the U.S. economy added a healthy 119,000 jobs, both of which would favor holding rates steady.
Traders have since shifted back to favoring a rate cut following weak retail data and consumer confidence numbers.
“I think this past week made it obvious that the market is desperate for another rate cut, or at least a signal that lower rates are coming,” Cox said. “And I’m not sure the Fed can give that up quite yet.”
A significant sell-off in cryptocurrency markets has also likely factored into the recent market swings, Sosnick noted. The price of bitcoin, which reached a record high of $125,000 in early October, tumbled to $80,000 on Friday amid a weekslong slide.
“I think one of the reasons we did fall so sharply last week was because so much money flowed out of crypto,” Sosnick said. “There were a lot of speculative investments related to cryptocurrency that had not been working out.”
“Because crypto has gone sort of mainstream, it’s not really divorced from the financial markets,” he continued. “And so, if you get a big drop in bitcoin and the like, it does have a spillback effect.”
