Holiday Season Uncertainty Rattles U.S. Markets as AI Hype and Rate-Cut Hope Fade

23 November 2025

Investors heading into the final weeks of 2025 are bracing for a stormy year-end as the twin pillars of the equity rally artificial intelligence excitement and expectations of near-term Federal Reserve interest-rate cuts appear to be wobbling. The benchmark S&P 500 index and the Nasdaq Composite have both pulled back sharply from their October record highs, illuminating how fragile market sentiment has grown.

The backdrop is unsettling. The S&P 500 is down roughly 4 % and the Nasdaq off about 7 % since the peak in late October. Their slide comes after a relentless multi-month rally that had most assumed would carry into year-end. That momentum has stalled, prompting institutional and retail investors alike to question whether the foundations of the rally remain intact.

At the centre of this shift is the growing scepticism around AI-linked stocks. Tech firms widely seen as standard-bearers for the AI boom such as Nvidia, Oracle Corporation and Palantir Technologies have all seen sharp pullbacks despite solid earnings announcements. The message coming from investors is that strong financials are no longer enough: proof of meaningful AI monetisation and sustainable growth is what counts.

Meanwhile, expectations that the Fed would ease monetary policy in December have faded, further gnawing at confidence. A recent jobs report triggered fresh debate about how weak the economy must be to warrant a rate cut. At the same time, inflation and capital-spending dynamics are muddying the outlook. The probability of a December cut now stands at roughly a coin flip.

Another worrying signal is the jump in volatility. The Cboe Volatility Index (VIX), often known as Wall Street’s “fear gauge,” has risen and the futures curve for volatility remains unusually flat suggesting that investors expect turbulence to persist rather than fade. Historically, flat or inverted volatility curves often precede prolonged uncertainty or downturns.

That said, some market watchers still cling to a glimmer of hope. History offers evidence that December can be a strong month for equities even after weak Novembers. According to data going back decades, such rebound potential exists, provided economic shocks don’t materialise or escalate.

However, the upcoming holiday season may feel less like a certainty of gains and more like a test of resilience. The parallels to the early-2000s tech bubble or other valuation-driven run-ups are being drawn with increasing frequency. The question is no longer whether value is rich but whether it is justified and sustainable. As veteran strategist Marta Norton put it, the market may not be in a full-blown bubble yet, but the ingredients are there for one.

From a practical skin-in-the-game perspective, this means investors and fund managers are re-examining positions. Many are reducing exposure to high-flying technology stocks, rotating into more defensive sectors, and stressing scenario-plans rather than relying on the “buy the dip” reflex that characterised the 2023-25 market. Reporting indicates that retail investors, once the eager foot-soldiers of tech rallies, have grown less willing to chase corrections aggressively.

The path forward is ambiguous. If the economy holds up, AI companies start translating promise into profits, and the Fed signals an easing path, the market could resume its upward march though perhaps from a more modest base. But if macro-headwinds intensify, supply-chain pressures return or valuations unwind materially, the year-end may be less about a “Santa Rally” and more about consolidation or repair.

In essence, the marketplace is at a fork: maintain faith that the two big growth levers still work, or confront the possibility that the good times may pause for a while. For now, investors appear to lean cautious. As one portfolio manager put it: “We are going into the holiday season with our guards up.” The next few weeks may define how much of the excess built into asset prices is genuine and how much is simply back-peddling to reality.