It’s interesting to be reminded of just how much stocks rely on sentiment about interest rates… many companies dropped sharply in value last week as it began to become less clear that the Federal Reserve will cut interest rates again at its next meeting, just like stocks soared when it became clear that labor market weakness was going to make the Fed begin to cut rates a few months ago, despite ongoing inflation concerns. A month ago, the probability of another 25-basis-point rate cut in December, according to futures markets, was close to 90%… now, after several Fed governors talked cautiously about inflation and the lack of recent employment data thanks to the government shutdown, it’s about 50%.
None of that has any immediate or direct impact on any of our investments, of course, I haven’t bought or sold anything because I felt like I was sure I knew what short-term interest rates would be in 2026… but it certainly impacts market sentiment, since we’re all used to the “don’t fight the Fed” advice about “easy money and those overnight rates can impact the real interest rates that matter to real companies and impact their borrowing costs, like the Prime Rate or the rate on Ten Year Treasury Notes.
It’s not just interest rates, of course — that nervousness over the Fed slowing down the move to “easier money” has been amplified by more mainstream media coverage of the wild cash consumption by tech folks like OpenAI, perhaps raising some more awareness among investors about the fact that this massive campaign to build hundreds of billions of dollars worth of data centers to meet future AI demand is, in part, speculative. People have been a bit worried about risk again this week, and we can also see that in gold, which popped back up by 5% or so in recent weeks, and also in the collapse of cryptocurrency prices — the major cryptos, despite the belief in some quarters that Bitcoin is becoming “digital gold,” tend to act more like tech ETFs on steroids in the short term.
That weakness last week doesn’t mean the S&P 500 is definitely going to fall over the next year, or that AI spending is over, and it doesn’t even mean that those AI startups are necessarily at the peak of their bubble valuations right now and about to crash — that’s essentially unknowable, and depends to a large degree on future events that shake up investor psychology… starting, perhaps, with NVIDIA’s (NVDA) earnings report this week (Wednesday evening), which should carry more weight after this mini-selloff.
NVIDIA reports after the close on Wednesday… as has been the case for two and a half years now, all eyes will be on Jensen Huang to see if there are any chinks in the armor.
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