The Stock Market’s 2 Biggest Tailwinds Are Faltering. Can It Get Its Mojo Back?

U.S. stocks haven’t recorded any gains so far this month. But there are reasons to be optimistic. (Photo by Spencer Platt/Getty Images)

The two biggest forces that have powered Wall Street’s record-setting rally this year are under attack, with investors now questioning both the fate of the artificial intelligence trade and the Federal Reserve’s near-term rate path.

Stocks suffered their biggest declines in more than a month Thursday, dragging all three major benchmarks into negative territory for November. The tech-focused Nasdaq slumped to its lowest levels since late October. An index of the so-called Magnificent Seven tech giants slumped 2.5%, with Nvidia retreating 3.6% and other AI-related names extending their recent declines amid growing tech skepticism.

“When the story shifts even slightly, or when interest rate hopes cool, the most richly valued parts of the market feel it first,” said Ruben Dalfovo, investment strategist at Saxo Bank. “And when prices assume almost flawless execution and very cheap money ahead, even a small change in the story hits valuations hard.”

Lingering questions over both the AI trade and the Fed’s rate path are likely to keep stock markets unsettled over the final weeks of the year, as well, given the dearth expected in official government data needed to clarify the Fed’s next move on interest rates and the uncertainty that continues to surround the AI investment boom.

The market’s benchmark volatility gauge, the VIX index, surged more than 17% during yesterday’s session, and was another 10% higher in after-hours dealing at 22.08, amid the broader market turmoil.

At that level, traders are expecting daily swings of around 1.4%, or 94 points, for the S&P 500 between now and the end of the year.

At present, investors appear to believe in at least some portions of the AI trade more than they do in a Fed rate cut, largely because Nvidia’s fiscal third quarter earnings next week are likely to provide a solid demand outlook for the sector that could drag the market out of its recent funk.

“After punishing companies for merely ‘good’ earnings, expectations have been reset from the previous ‘priced-to-perfection’ levels,” said Joe Tigay, portfolio manager at Catalyst Hedged Equity Fund. “This means future earnings reports will face a more achievable hurdle, increasing the probability of positive surprises and sustained rallies.”

“The core story—massive corporate investment in AI—isn’t slowing down,” he added. “This intense, real-world spending confirms that the AI trade is fundamentally sound, not just speculative hype.”

Bets on a Fed rate cut in December, meanwhile, have crumbled amid hawkish commentary from various Fed officials and signals from the White House that the Bureau of Labor Statistics won’t publish jobs or inflation data for the month of October.

Traders now see next month’s decision as a coin flip, after pricing in odds of a quarter point reduction at around 95% as recently as mid-October, according to the CME Group’s FedWatch.

However, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, notes that Fed officials opting for a rate cut in September remain committed to further easing.

“These members have not publicly changed their view, and we see no signs of a trigger in official data that likely will be released before December’s meeting to prompt a change of heart,” he said in a note published Friday.

Whether markets can regroup over the coming weeks will largely depend on both the tone and substance of Nvidia’s third quarter earnings and any data releases that will help the Fed reach a conclusion on its December policy decision.

That said, stocks are still up nearly 15% for the year, and a number of tailwinds heading into 2026 remain intact, in the form of tax cuts, new Fed leadership, possible government stimulus checks tied to tariff revenue and robust corporate earnings forecasts.

Global investors are also bullish on U.S. stocks, and are on pace to allocate around $134 billion to domestic funds this year, the second-largest on record, according to data from Bank of America’s weekly ‘Flow Show’ report.

“The key takeaway remains: if the economy avoids a hard landing, the AI trade—which is a secular, multiyear theme of productivity growth—will simply carry on,” said Tigay at Catalyst Hedged Equity Fund.

Write to Martin Baccardax at martin.baccardax@barrons.com