Important points
- Tech stocks dropped this week as investors grew skeptical about the recent surge in AI stocks, overshadowing Nvidia’s strong earnings report. However, some experts remain hopeful that earnings growth will attract investors again.
- On another front, there is a significant divide among Federal Reserve officials regarding the upcoming policy meeting, adding further uncertainty to the already jittery market.
The stock market seems to be at a standstill. And it might stay that way for a while.
Tech stocks have struggled for some weeks now. There was hope that Nvidia’s (NVDA) impressive earnings report would bring some life back into the sluggish AI sector. While they posted strong profits, they didn’t pay dividends. Then on Thursday, stocks dipped as the CBOE Volatility Index (VIX)—often referred to as the “fear index”—rose to levels not seen since April’s tariff troubles.
Stocks bounced back a bit on Friday, yet many favored AI stocks—like Nvidia, Broadcom (AVGO), Palantir (PLTR), Oracle (ORCL), and Vistra (VST)—continued to slide, signaling that the enthusiasm for AI still seems weak. Market experts are now trying to make sense of the mixed signals and erratic movements from the past week.
Why this is important
Tech stocks have been the backbone of the bull market over the last three years and will likely play a crucial role in shaping market sentiment and stock performance going forward. The Federal Reserve’s interest rate decision in the upcoming month will also be pivotal in influencing stock prices.
AI-related investments have faced challenges before. Back in July 2024, tech stocks sank over concerns about potential overinvestment in AI, before making a comeback toward the year’s end. Similar worries cropped up in January with the emergence of Chinese startup DeepSeek. But that setback didn’t last long.
Wedbush analyst Dan Ives, a notable supporter of tech stocks, mentioned on Friday, “We are experiencing another ‘deep-seeking moment.'” He likened today’s debate over the AI bubble to past instances where skeptics misjudged tech advancements, such as the early rejection of the iPhone in 2008 and Microsoft’s shift to cloud computing in 2014.
“This AI revolution is just beginning,” he stated. “From our perspective, we’re in the third year of a decade-long cycle and believe it’s wise to invest in AI and tech stock winners.”
However, Barclays analyst Ajay Rajadhyaksha warned that the main risk for the tech sector—and, by extension, the stock market—isn’t an immediate crash in valuations. It’s that the sustained performance we’ve seen might start to wane, which could trigger an exodus of investors.
Rajadhyaksha believes such an outcome is unlikely but acknowledges there are risks connected to AI that investors need to monitor. Technology firms are increasingly seeking funds through credit markets to support their AI investments, which had primarily relied on cash flow until now. This shift raises the vulnerability of the entire economy to the AI boom and makes tech firms more sensitive to interest rate changes. He highlighted that energy constraints could slow AI spending, impacting specific companies like Nvidia.
He concluded that, barring significant disruptions, a major shift in market leadership seems improbable.
The Federal Reserve’s December meeting could introduce more volatility, as policymakers are sharply divided on how aggressively to adjust interest rates. While there are indications of rising inflation, some see weaknesses in the labor market as justifiable reasons for potential rate cuts. On the other hand, more cautious voices point to economic uncertainty as a concern. The ongoing government shutdown has created gaps in official data, making decision-making even trickier.
The September jobs report, the last significant labor market update before the Fed’s December meeting, produced mixed signals. The U.S. added more jobs than expected, yet the unemployment rate climbed to a four-year peak. Deutsche Bank economists expressed that the report serves as a Rorschach test, allowing both sides of the Fed to interpret it in their favor.
Experts suggest that the Fed’s decisions on interest rates could be crucial to whether the AI rally keeps up steam or dissipates. They argue that lowering rates might ignite the rally by providing liquidity to the market, while maintaining current rates could hinder the recovery of tech stocks.
Investor sentiment regarding the Fed’s actions is fraught with uncertainty. Just a month ago, the likelihood of a December rate cut seemed almost guaranteed, but that has since dropped below 40%. However, after one official expressed openness to cuts next month, those odds jumped back to 70% on Friday.
Analysts noted that in uncertain environments, where interest rate and labor market signals are muddled, markets tend to exaggerate volatility. In such times, trading is often swayed by sentiment and market mechanics.
