Shutdown Progress Gives Stocks a Boost. But These Market Concerns Can’t Be Overlooked.

Hopes for an end to the longest government shutdown on record are giving stocks an early Monday boost. (NYSE)

Key Points

• U.S. stocks are expected to recover Monday, driven by a potential end to the government shutdown and bargain hunting after a tech selloff.
• The Nasdaq Composite fell nearly 3% last week, its worst performance since April, due to a pullback in Magnificent Seven stocks.
• Investor sentiment around the AI trade remains the biggest market issue.

U.S. stocks are likely to claw back a big chunk of last week’s decline in early Monday trading, as risk appetite returns amid reports of a potential end to the longest government shutdown on record and investors hunt for bargains following the biggest tech selloff since last spring.

The long, and likely volatile path to reopening the federal government, however, will only mask the major issues investors are grappling with heading into the final weeks of the trading year, and markets could break in either direction once some of those questions are addressed.

“While the policy crosscurrents are complex, in the very near term we think an end to the shutdown will be beneficial as it did appear to be a contributing factor to the indigestion the stock market experienced over the past weeks,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.

“But we don’t think it will solve all the stock market’s problems as issues like stretched valuations, the peak in earnings sentiment, and AI jitters are likely to remain,” she added.

Tech stocks led last week’s broader market decline, with the Nasdaq Composite falling nearly 3% on the week, its worst performance since April, amid a big pullback in Magnificent Seven megacap stocks tied to lingering concerns over the artificial intelligence investment boom.

Financing the data center construction that will power the AI revolution remains a key market focus, as does the ability of some of its most-important companies to maintain the earnings growth needed to justify their lofty valuations.

An end to the government shutdown could address portions of both concerns through the return of economic data that will allow the Federal Reserve to deliver on market bets for a December rate cut.

But with the last policy meeting only a month away, and the shutdown likely to last several more days, Fed officials, and investors, may not have the fullest picture of inflation and labor market pressures in an economy that is otherwise showing remarkable resilience over the second half of the year.

The CME Group’s FedWatch tool pegs the odds of a December rate reduction at around 65%, but with a huge slate of Fed officials on tap for this week, sentiment around rate cuts and the central bank’s policy path is likely to oscillate as Treasury yields tick higher and gold prices reclaim the $4,050 mark in early Monday dealing.

However, Ole Hansen, head of commodity strategy at Saxo Bank, notes that a government reopening, as well as the recent moves higher in gold and Treasury yields, “pull the spotlight back onto the U.S. fiscal trajectory—an issue markets are finding increasingly difficult to dismiss.”

With U.S. debt topping $37 trillion last month, and the last fiscal year deficit only modestly trimmed by tariff collections, President Donald Trump’s suggestion of a $2,000 “dividend” to middle and lower income Americans could add to those concerns.

The biggest issue for markets, however, remains investor sentiment tied to the AI trade, which has powered the lion’s share of gains since the early April lows and delivered around 45% of the S&P 500 ’s $613 billion in third-quarter earnings.

Jonas Goltermann, deputy chief market economist at Capital Economics, notes that last week’s selloff was more likely stoked by “sharp drops in the prices of other ‘bubbly’ assets, like gold and crypto” than issues related to the shutdown.

AI remains the main game in town and investors have mostly shrugged off the political drama,” he said in a note published Monday. “Our sense remains that the core of the AI thesis remains intact and would probably survive a continued separating of the wheat from the chaff in the frothier parts of the equity market.”

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