The Big Picture

Briefing.com Summary:

*Fed pushback on near-term rate cuts triggered broad de-risking across equities, crypto, and AI-linked stocks.

*Mega-caps and AI leaders lost momentum as valuation worries and overinvestment concerns resurfaced.

*Market pullback reflects overdue cooling after excessive complacency, concentration, and rate-cut optimism.

What is going on with the stock market? Following a period in which it was setting one new record high after another, a period when it had no fear of seasonality (looking at you, September), and a period when it essentially had no fear, the stock market now looks scared of its own shadow.

It is a long shadow, too, cast by the enormous mega-cap stocks and the massive AI trade. They have turned into sleeping giants, which in turn has put the bull market to rest.

Everybody needs some downtime, though, and that is the essence of this pullback. The stock market needed some rest, having partied almost nonstop since the April lows.

Casting a Line

If one wants to cast some blame for the stock market's recent struggles, they can throw a line to Fed Chair Powell. This stock market hasn't been the same since the Fed Chair declared on October 29 that a rate cut in December is not a foregone conclusion, "far from it."

Incidentally, the high for the year for the S&P 500 (6,920) was on October 29. Not that it has been all downhill from there, but let's just say it has been a slippery slope. The S&P 500 flirted with 6,500, having breached key support at its 50-day moving average on a closing basis earlier this week for the first time since the recovery rally began in April.

Stop-loss orders were presumably triggered on that break and compounded the selling interest. But the stock market's struggles go beyond that.

They also reach into the realm of cryptocurrencies, namely Bitcoin, which has run headlong into a "crypto fall." Bitcoin traded just north of $126,000 in late September but plummeted to just below $81,000 this week. That is a 35% decline, which certainly fits the definition of a bear market and which has rattled many buyers without diamond hands.

Reports of margin calls and forced liquidations have made things worse, bleeding into the stock market, reportedly, which has been a source of funds for meeting margin calls. The stock market has also been a beacon for de-risking on the part of equity investors watching Bitcoin and other cryptocurrencies unravel.

The Gist of Matters

The de-risking hit the meme stocks hard, as well as the AI trade and a multitude of growth stocks that had been riding on expected rate cuts.

Another component of the de-risking was the AI bubble talk. It has been talked about in the past, but it didn't matter then because the prevailing view was that the Fed would be cutting rates multiple times before year-end. That view fell by the wayside on October 29, and it ran headlong into concerns about overinvestment and debt financing of data centers by the hyperscalers.

The gist of matters there is that investors had doubts about the investment strategy and when there would be meaningful returns on that investment. Oracle (ORCL) has been the epicenter of these concerns, plummeting more than 40% from the high it hit on September 10 after it reported its fiscal Q1 results, highlighted by a 359% yr/yr increase in Remaining Performance Obligations to $455 billion and the signing of a $300 billion five-year contract with OpenAI.

There was an initial sense of relief when NVIDIA (NVDA) reported more blowout results for its fiscal third quarter that investors might have made too much of the AI bubble concerns. NVIDIA's stock jumped as much as 5.1%, but that gain soon fell by the wayside, and NVDA shares closed down 3.2% in the wake of its report.

It was a massive intraday swing that could ostensibly be tied to the Bitcoin de-risking. It certainly didn't have anything to do with NVIDIA's operating performance. Ironically, though, NVIDIA's supercharged revenue growth (data center revenue up 66% yr/yr) and Jensen Huang's declaration that "Blackwell sales are off the charts, and cloud GPUs are sold out" may have further stoked concerns about overinvestment.

Briefing.com Analyst Insight

The stock market, frankly, has been due for a pullback. It was overextended on a short-term basis, too complacent about risk, too concentrated in the mega-cap stocks, and too expensive from a valuation standpoint.

It was also too sure of itself that the FOMC would acquiesce to its rate-cut desires. When a litany of Fed officials started to rebuff it, the trading tone changed. The switch got flipped from risk-on to risk-off.

The fundamental outlook dimmed, the technical situation deteriorated, momentum trading cut the other way, and the market's leadership stocks failed to lead.

Fittingly, the stock market seemed to gain some footing after New York Fed President Williams (FOMC voter) said he sees room for a near-term adjustment to the target range for the fed funds rate. After that remark, the probability of a 25-basis-point cut at the December FOMC meeting rocketed from 37.6% to 73.7%, according to the CME FedWatch Tool, and the stock market rallied.

It didn't matter that Boston Fed President Collins (FOMC voter), Cleveland Fed President Hammack (2026 voter), and Dallas Fed President Logan (2026 voter) all tempered their belief that a rate cut in December is necessary. A struggling stock market latched on to its favorite lifeline, trying to will that extra cut this year into existence.

We remain in the camp that it won't happen. The mere idea that a rate cut in December is not a foregone conclusion, cultivated by Fed Chair Powell at the end of October, has been at the root of an overdue pullback this month.

--Patrick J. O'Hare, Briefing.com

(Editor's note: The next installment of The Big Picture will be published the week of December 1.)