High-Flying Stocks Tumble as Rate-Cut Optimism Fades

Federal Reserve officials are navigating policy decisions with far less clarity than usual after the government shutdown cut off access to key economic data and that vacuum of information is starting to rattle investors.

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A sudden wave of risk-off sentiment swept through markets on Thursday, triggering steep losses in some of the year’s strongest-performing stocks and deepening the recent slide in digital assets. Many traders attributed the selloff to fading expectations that the Fed will deliver another rate cut in December. The odds of such a move have fallen sharply: swaps markets now assign only about a 50% chance of a reduction, down from 72% just a week ago, as policymakers have offered little confidence in recent comments that additional easing is imminent.

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The selloff was most severe among high-momentum stocks and those popularly traded by retail investors. These pockets of the market which had posted some of the biggest gains earlier in the year saw their largest declines since April. Momentum strategies typically involve buying outperformers and shorting laggards, and many of those top performers have been companies tied to artificial intelligence, where valuations soared amid the enthusiasm surrounding the technology.

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“The expectation of lower interest rates made it easier for investors to look past the stretched valuations on momentum names,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Now that the outlook for cuts has dimmed, investors are trimming exposure to pricey growth stocks.”

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Bank of America Corp.’s momentum-stock basket tumbled 4.7% on Thursday its worst showing since April, when markets were shaken by President Donald Trump’s tariff threats. That same basket had surged as much as 63% from its April lows through Monday.

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Momentum-heavy growth stocks are particularly sensitive to interest-rate expectations because lower rates reduce discount rates in valuation models, allowing multiples to expand, explained Michael O’Rourke, chief market strategist at JonesTrading. “If investors lose confidence that rates are coming down quickly, then expectations reset and valuations contract,” he said.

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Even before Thursday’s drop, beneficiaries of the AI boom had started losing steam. Concerns over valuations and massive capital-spending plans pushed many investors to lock in profits. On Thursday, that reversal accelerated: AI names within Bank of America’s momentum basket sank sharply, with Sandisk Corp. falling 14% and Astera Labs Inc. dropping 8.4%. Among the megacaps, Nvidia slid 3.6%, Broadcom lost 4.3% and Palantir tumbled 6.5%.

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Across major US indexes, the Nasdaq 100 was hit hardest, dropping 2%, while the S&P 500 fell 1.7%. Bitcoin continued its retreat from its October high, now down more than 22%.

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The pullback was especially intense in stocks favored by individual traders. Barclays analysts recently cited a “significant decline” in retail trading activity based on their equity-euphoria index. The Citi US Retail Favorites basket plunged 6%, its biggest drop since April 4.

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That basket which includes Tesla Inc., SoFi Technologies Inc. and Riot Platforms Inc. had nearly doubled in the 12 months through mid-October but is now down 15% from its peak. A meme-stock ETF built around Opendoor Technologies Inc. fell more than 11%, its sharpest selloff since launching last month.

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The VanEck Social Sentiment ETF and Cathie Wood’s ARK Innovation ETF also slid more than 5%. Leveraged products tied to Bitcoin miners and quantum-computing names suffered even deeper losses, with some down more than 20%.

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Even stocks that investors love to bet against were pummeled. Goldman Sachs Group Inc.’s basket of the most-shorted firms with market values above $1 billion fell 5.5%, also its worst day since April.

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Behind the turmoil is a deepening uncertainty about the Fed’s path forward. Policymakers are confronting a difficult mix: stubborn inflation, signs of cooling in the labor market and thanks to the record-long shutdown a lack of timely data to guide decisions.

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The shutdown came at a moment when views inside the Fed were already diverging. Last month, after approving a second consecutive quarter-point cut, Chair Jerome Powell stressed that another reduction was far from guaranteed.

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On Thursday, St. Louis Fed President Alberto Musalem urged restraint on further rate cuts, noting that inflation remains above the Fed’s 2% goal. Minneapolis Fed President Neel Kashkari told Bloomberg News he opposed the last cut and remains unsure about the right move for December. Cleveland Fed President Beth Hammack stated that policy should stay “somewhat restrictive.”

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“I can argue for a cut or for holding steady it all depends on the data,” Kashkari said. Traders are waiting for the backlog of delayed economic releases to resume before making firmer bets.

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“The steady drip of headline-driven anxiety has created a lot of volatility in stock prices,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. Investors should stay focused on the broader outlook for lower rates next year, he added.

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Even a wave of delayed reports is unlikely to alter the trend toward weaker job creation a trend that state-level and private-sector data continued to signal throughout the shutdown.

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