The U.S. stock market is experiencing significant declines, heading toward one of its most challenging days since the spring sell-off, largely driven by concerns over the valuation of AI-focused stocks, particularly Nvidia. These worries come amid mounting skepticism about the Federal Reserve’s impending interest rate cuts, which many investors had been counting on.
As of early afternoon, the S&P 500 has dropped 1.5%, moving further away from its record high achieved late last month. This downturn is on track to be the worst in a month and only the second since a sharp decline in April, which followed an unexpected announcement by then-President Donald Trump regarding new tariffs. The Dow Jones Industrial Average fell by 565 points or 1.2%, while the Nasdaq composite took a considerable hit, down 2.4%.
Nvidia’s stock was particularly affected, suffering a decline of 4.7%. Other notable AI-related companies also saw steep losses, with Super Micro Computer sharing a 7.6% drop, Palantir Technologies down 6.6%, and Broadcom falling by 4.7%. Concerns are growing among investors about the potential for these high-flying AI stocks to continue their upward trajectories, especially given their already remarkable gains this year.
For instance, Palantir has surged nearly 174% year-to-date, but such impressive performance has prompted comparisons to the dot-com bubble of 2000, which ultimately resulted in a significant market crash. This context is making traders increasingly anxious as they consider the possibility of stagnant interest rates from the Federal Reserve.
Historically, interest rate cuts have been a boon for market performance, as they provide economic stimulation and enhance asset values, even while potentially exacerbating inflation. However, recent market sentiment suggests a diminishing likelihood that the Federal Reserve will announce further rate cuts during its upcoming December meeting. Traders currently assign a probability of only 47.6% to this outcome, a marked decline from nearly 70% just a week ago.
Comments from Federal Reserve officials, including Susan Collins, the president of the Federal Reserve Bank of Boston, have contributed to this shift in sentiment. Collins indicated that maintaining steady interest rates may be advisable “for some time,” a notable change from her earlier position advocating for another reduction.
The ongoing U.S. government shutdown has complicated matters, delaying critical updates regarding the job market and other indicators of economic strength. Historically, the stock market has shown resilience during such shutdowns, but there is concern that upcoming economic reports could sway the Federal Reserve’s decision, potentially stifling further cuts to interest rates that have been factored into stock valuations.
Doug Beath, a global equity strategist at Wells Fargo Investment Institute, noted that the upcoming influx of economic data could lead to increased volatility in the coming weeks.
Adding to the market turbulence, The Walt Disney Company reported a 7.8% decline after its latest quarterly earnings exceeded analysts’ expectations but fell short in revenue estimates. In contrast, Cisco Systems saw a rise of 4.9% after delivering earnings and revenue figures that surpassed expectations.
On the bond market front, Treasury yields are also trending upward, further pressuring stock and investment prices. The yield on the 10-year Treasury climbed to 4.10%, up from 4.08% late in the previous session.
Internationally, the stock markets in Europe are feeling the pressure, following modest gains in Asia. Japan’s Nikkei 225 index recorded a slight 0.4% increase, despite another challenging day for SoftBank Group, which dropped 3.4% after announcing the sale of its $5.8 billion stake in Nvidia earlier in the week.
