Market Sell-Off Raises Questions About a Volatile November

Highlights

U.S. stocks ended a turbulent week lower as doubts about the financing and financial returns behind the AI investment boom outweighed gains linked to Anthropic’s IPO announcement and the Federal Reserve’s decision to hold rates steady. Economic data remained firm: third-quarter GDP grew at an annualized 3.4%, while inflation stayed above the Fed’s 2% target. Market participants will focus on AI-related earnings and the potential implications of the midterm elections for regulation. The central tension is between resilient growth and persistent inflation, which could keep interest rates high even as investors look for a possible year-end recovery.

Sentiment Analysis

• The article’s overall tone is cautious and mixed. Recent market declines, sharp technology-stock losses, and substantial fund outflows indicate heightened investor anxiety and risk aversion.


• Inflation above the Federal Reserve’s 2% target, together with robust consumer spending and business investment, supports expectations that interest rates could rise again. This prospect adds pressure to technology valuations and clouds the near-term outlook.


• There are also reasons for measured optimism. The economy continues to expand, and Deutsche Bank’s historical-seasonality analysis suggests U.S. stocks may recover after an October low during midterm-election years. Some analysts also see potential structural opportunities later in the year.


• However, the possible recovery is not assured. AI earnings, inflation, Federal Reserve decisions, and election-related regulatory uncertainty remain important tests. The sentiment is therefore best described as predominantly cautious, with a conditional positive outlook.

Article Text

U.S. stocks began the week with losses and later recovered, but the rebound did not last. Gains associated with Anthropic’s announcement of an initial public offering and the Federal Reserve’s decision to leave interest rates unchanged were outweighed by concerns about the funding requirements and financial returns of the artificial intelligence investment theme. Investors are expected to keep scrutinizing earnings from AI-related businesses in the coming week. The results of the midterm elections may also influence the outlook for AI regulation, adding another source of uncertainty.

Recent economic figures presented a mixed challenge for policymakers and markets. U.S. gross domestic product grew at an annualized rate of 3.4% in the third quarter, exceeding expectations. Consumer spending increased 3.8%, and investment in business equipment rose 20.9%. These figures suggest that demand and business activity remained strong despite tighter monetary conditions.

Inflation, however, remained elevated. The personal consumption expenditures price index rose 0.5% month over month in September, accelerating by 0.2 percentage points from August. Its year-over-year rate increased from 3.4% to 3.6%. The core PCE measure, which excludes volatile food and energy prices and is closely monitored by the Federal Reserve, rose 0.3% for the month and 3.1% over the previous 12 months. That remained well above the Fed’s 2% target.

Bob Schwartz, senior economist at Oxford Economics, told Yicai Global that strong GDP growth reflected the ongoing AI boom alongside improvement in other parts of the economy. He expects growth next year to remain above market consensus, though increasingly reliant on capital spending associated with AI, defense, and a favorable inventory cycle. Schwartz said there was little to change the Federal Reserve’s view that the economy and labor market remained resilient, leaving inflation as the near-term focus. The September inflation rebound, he said, supported the possibility of another rate increase.

The Federal Reserve held rates steady during the week and said it needed more information before considering a policy adjustment. Chair Kevin Warsh said he was reluctant to describe the economy as “overheated,” partly because estimating its non-inflationary growth rate is difficult, particularly when productivity is improving. Yet strong consumer spending, business investment, and rising price indicators could challenge that assessment. Investors also continued to consider the possibility that economic growth was running faster than many central bank officials regard as sustainable.

Market pricing for Federal Reserve policy became less hawkish as financial markets fluctuated. Futures implied a 78% probability of a December rate increase, down from 91%. They also indicated 71 basis points of tightening by next September, a decrease of 5.2 basis points from Thursday. Deutsche Bank said Warsh repeatedly emphasized strong growth at his press conference. Although he avoided giving forward guidance, the bank said his comments reinforced the September Summary of Economic Projections, when a large majority of Federal Open Market Committee participants expected another increase before year-end. Deutsche Bank continued to forecast increases of 25 basis points in December and March.

Schwartz said September inflation had moved away from the Fed’s 2% objective. Energy costs spilling over into core prices and strong AI investment demand could keep policymakers alert and potentially result in two further increases. He also noted that falling energy prices and a labor market that does not generate inflation could eventually ease price pressure by the end of next year, creating conditions for a policy shift.

Market weakness was visible in weekly index performance. The Nasdaq and S&P 500 each recorded a third consecutive weekly decline, and the Nasdaq stood 7.8% below its record closing high from October 6. According to Dow Jones market statistics, communication services fell 8.5% and information technology declined 1.8%, making them the two losing S&P 500 sectors for the week. Communication services also recorded its largest monthly decline since April 2022. Defensive areas attracted investors: health care gained 3.1%, while materials and utilities each rose about 2%.

Technology losses followed disappointing quarterly results from Intel and Amazon, released late Thursday. Intel’s shares plunged 28.6% on Friday, erasing more than $140 billion in market value. Data provided to Yicai Global by LSEG showed net outflows of $6.65 billion from U.S. equity funds during the previous week. The figures also indicated record net outflows of $14.8 billion from individual stocks and a level of institutional weekly net selling that ranked as the tenth-largest peak since 2008. Bank of America said communication services had its largest weekly outflow since records began in 2018, while technology saw $1.9 billion in weekly net outflows, its largest since June 2026.

Looking ahead, analysts expect a period of high short-term volatility as investors assess earnings and election developments. Deutsche Bank argued that U.S. stocks may be near a final low for the year, citing seasonal patterns dating to 1928: in midterm-election years, markets have often reached a low in late October and risen over the following three months. Goldman Sachs was more cautious, expecting a 25-basis-point rate increase in December and warning that inflation risks and high rates could continue to weigh on technology valuations.

Morgan Stanley said the market would need to clear three hurdles before its next sustained rebound. It suggested the S&P 500 could retreat to the 7100–7200-point range before a durable advance begins, while maintaining its year-end target of 8000 points. The outlook therefore hinges on whether solid economic growth can coexist with easing inflation and credible returns from AI investment; until those questions are resolved, sharp swings may persist.

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