S&P 500 gets tech lift, but Fed anxiety lingers

The S&P 500 wiped out a 1.4% slide, bouncing after a breach of its 50-day moving average. A key gauge of equity volatility — the VIX — briefly topped 23.

A renewed bout of volatility gripped Wall Street as skepticism grew about the Federal Reserve being able to slash interest rates in December.

The relief brought by the end of the longest shutdown in American history quickly gave way to market swings after a host of Fed speakers threw cold water on bets for further policy easing. Hot areas favored by momentum traders such as artificial-intelligence bounced from an earlier selloff. While the rebound lifted the S&P 500, more than 300 of its shares were down. Bitcoin was on the verge of wiping out its 2025 advance.

Compounding the angst is an information vacuum: Investors and policymakers are flying blind after the US government closure starved them of crucial data. The outlook for lower rates favoring Corporate America alongside booming AI prospects have powered a torrid rally since the April meltdown, making many traders look past high valuations to keep chasing the market higher.

“Stocks don’t rise in a straight line and a pullback has been long overdue,” said Rick Gardner at RGA Investments. “While the government shutdown is over, there continues to be an economic data blackout that will take some more time to work itself out and this is partly why stocks have been pulling back and trying to find their footing.”

Even with the lack of economic data, Gardner still thinks the Fed will cut rates in December, though he expects some “market bumps” over the next few months as the resumption of the economic data reports may cause some additional instability.

The S&P 500 wiped out a 1.4% slide, bouncing after a breach of its 50-day moving average. A key gauge of equity volatility — the VIX — briefly topped 23.

The yield on 10-year Treasuries was little changed at 4.12%. The dollar wavered. UK markets were roiled as speculation about the budget heightened uncertainty over the nation’s finances. Oil climbed as geopolitical risks mount from Russia to Iran.

A slew of Fed officials have in recent days expressed skepticism over the need for another cut in December, or outright opposed one. It remains unclear whether they can persuade enough voting members of the Federal Open Market Committee, given a number of policymakers are still more worried about weakness in the labor market.

Financial markets have taken note of the volume of comments coming recently from the Fed’s so-called inflation hawks. Investors have marked down the odds of a rate cut in December to less than 50%, based on federal funds futures contracts. Before the Fed’s October meeting, they were almost fully pricing in a reduction.

Their remarks come less than a month after Chair Jerome Powell warned that a December cut is far from a “foregone conclusion.”

“The tough but business-as-usual wrestling match over a December rate cut risks morphing into a crisis of governance at the Fed, with implications that extend well beyond whether it does or does not cut then,” said Krishna Guha at Evercore. “Absent miraculous clarification from limited data, Powell is in a rough spot. We urge cool heads and compromise.”

Guha says that he still leans toward a “hawkish cut,” but the odds have diminished.

“Our expectation for a soft October employment report and under-control October core CPI inflation should settle the internal debate at the FOMC in favor of an additional 25 basis-point rate cut. With that said, the decision is likely to be contentious, with a high possibility of additional hawkish dissents,” said Gennadiy Goldberg at TD Securities.

“The Fed isn’t trying to guide the markets towards a rate hold in December,” said Kyle Rodda at Capital.com. “What it’s trying to do is give itself optionality and rebalance the markets, which had up until recently priced-in very aggressive rate cuts despite the state of price pressure in the US economy, to reflect both risks to the labour market and inflation.”

Aside from the macroeconomic picture, concerns over lofty areas of the market have surfaced. AI euphoria is facing its first prolonged test, as investors look askance at massive borrowing to fund the technology’s buildout.

Earnings for most Big Tech companies have been in line or above expectations, though the outlook has been murky when it comes to where borrowing costs are headed. Next week, Nvidia Corp. delivers quarterly earnings on Wednesday. Options traders are pricing in a 6.2% swing in either direction for the stock, its highest implied move in a year, according to data compiled by Bloomberg.

“Given the “AI-ROI” theme driving volatility, its earnings will be a huge test for the markets and the AI-trade, and could either ease fears about AI valuations or inflame them considerably,” Rodda noted.