Technology stocks far outpaced other sectors in both September and October. As we told our Model Portfolio subscribers in our October monthly review, we believed some of this momentum could be attributed to portfolio “window dressing.”
The majority of stock mutual funds have fiscal years that end on October 31, giving fund managers an incentive to show they were positioned in the top-performing areas of the market in their annual reports.
Because many of the year’s strongest performers continued to surge into late October, it is not surprising that some of that air has come out of those stocks in the first two weeks of November.
While the volatility we saw this week—led by technology names—is never pleasant, our long-term view on the AI theme remains positive.
As we recently discussed in “So Are We Headed for a Crash, or What?”, investors worried about a repeat of the year-2000 tech bust can take comfort in the many important differences between that environment and today’s.
A more reluctant Fed?
Another factor weighing on markets this week has been the tone from Federal Reserve officials. Some have made statements that seem to dampen hopes for further rate cuts.
The Chairperson of the Fed, currently Jerome Powell, naturally gets the most attention. But the Federal Open Market Committee (FOMC)—the group that actually votes on interest rate changes—consists of twelve voting members, each with an equal vote.
Since the last Fed meeting on October 29, when the Committee cut interest rates another quarter point, several voting members have signaled a more cautious stance.
Boston Fed President Susan Collins, a voting member this year, said the bar for further cuts is now “relatively high” and that policymakers need more sustained evidence before easing again.
Atlanta Fed President Raphael Bostic argued that inflation remains the “clearer risk” and warned against stimulating the economy too aggressively.
St. Louis Fed President Alberto Musalem added that the Fed has “limited room” to reduce rates further without becoming overly accommodative.
Minneapolis Fed President Neel Kashkari revealed that he did not support the October rate cut and remains undecided about December. He is not a voter this year but is scheduled to rotate onto the Committee in 2026.
Despite all this commentary, short-term interest rates have barely moved. This suggests the bond market’s expectations for future cuts have not shifted much.
Investors and market pundits have focused heavily on the idea that the Fed is turning more hawkish. This narrative would help explain the recent pullback in stocks, but it is not clear we are looking at any real change in policy expectations.
Where do we go from here?
After a big run in September and October, particularly among leading technology and AI stocks, some cooling off was almost inevitable.
Sharp declines are uncomfortable, but they don’t change the bigger picture. The AI story remains strong, companies continue to invest aggressively, and earnings have so far supported the long-term case.
As for the Fed, even though a handful of officials have sounded more cautious recently, short-term bond yields, which provide the ultimate read on interest rate expectations, are essentially unchanged.
Overall, we remain optimistic about the trajectory for both AI and monetary policy. Importantly, these two forces are linked.
AI-driven productivity gains are inherently disinflationary and could put upward pressure on unemployment, both of which would push the Fed toward easier policy over time.
President Trump cannot replace Fed Governors outright, nor does he have any direct influence over regional Fed Bank Presidents, who are selected through an internal process. But he will appoint the next Fed Chair when Powell’s term ends in May.
It is hard to imagine Trump supporting anyone other than an individual who shares his interpretation of the appropriate policy response to current economic conditions (lower rates to support housing and other struggling sectors).
As time passes, we get closer to the moment when Trump names Powell’s replacement and the new Chair starts to lead the Fed in a new—and possibly much more dovish—direction.
