Investors eye holiday season turbulence amid AI and rate cut doubts

NEW YORK - Stock market investors are preparing for a turbulent year-end sparked by uncertainty over near-term Federal Reserve interest rate cuts and mounting worries that artificial intelligence companies, which have propelled the market to new records this year, are overvalued.

The market continued to slide this past week, despite equity indexes rebounding sharply on Friday. As of Friday's close, the benchmark S&P 500 index and Nasdaq Composite were down 4% and 7% respectively from their late October record highs.

After a relentless rally since April driven by AI excitement and expected rate cuts, market exuberance this week gave way to caution, with investors warning of more choppiness into the holiday season as doubts grow over those two key themes. "It's certainly approaching what looks like is going to be a volatile holiday season," said Eric Kuby, chief investment officer at North Star Investment Management in Chicago.

"Without a rate cut … and with this renewed fear out there, it seems like it's going to be a much more difficult holiday season than we had hoped before."

Volatility picked up dramatically this week, with the Nasdaq and S&P 500 on Thursday experiencing the biggest intraday swings since U.S. President Donald Trump's "Liberation Day" tariff announcement in April sent markets spiraling.

Despite a modest retreat on Friday, the Cboe Volatility Index, known as Wall Street's "fear gauge," remains above the key 20-level, suggesting persistent investor anxiety.

The VIX futures curve - a snapshot of volatility expectations over coming months - also appears unusually flat, signaling market expectation for lingering volatility.

Still, many investors have said a pullback was overdue after the S&P 500 soared 38% from its April year-to-date low through late October. Following Thursday's tumble, the index was 5% down from its October high, its first 5% pullback in 149 days, said Keith Lerner, chief investment officer at Truist Advisory Services. By comparison, there has been an average of 77 days between pullbacks of at least 5% since 2010, Lerner said.

The S&P 500's price-to-earnings ratio, based on earnings estimates for the next 12 months, had dipped to 21.8 as of Thursday, down from 23.5 about a month ago, according to LSEG Datastream. But that current valuation still stood well above its 10-year average of 18.8.

"You're resetting those high expectations," Lerner said. "That likely has maybe a little bit more to go as far as just people having more doubts and uncertainties." Meanwhile, retail investors who bought the dip following April's tariff swoon and have helped the market bounce back from selloffs, are showing signs of fatigue.