Markets Pull Back as Labor Concerns Shake Confidence in AI Rally

Markets reversed course Thursday as fresh signs of labor market weakness collided with renewed skepticism around stretched AI stock valuations. A sharp rise in corporate job cuts and signs of faltering hiring drove a broad risk-off tone. Mega-cap tech and crypto led the decline, while bond yields fell on growing bets that the Fed will be pushed toward further rate cuts. Despite the selloff, some analysts suggest the pullback may be a healthy reset after months of exuberance.

Key Headlines & Market Movers

• Labor Market Red Flags Shift Fed Expectations: Private-sector data filled the void left by the government shutdown, with Challenger reporting the most October job cuts since 2003, and Revelio Labs showing a drop in nonfarm jobs. While historically noisy, these figures added weight to concerns that the labor market is weakening more than expected. Treasury yields dropped sharply, and markets are now pricing in better than 60% odds of a December rate cut. Several Fed officials, however, maintained a cautious tone, emphasizing inflation risks.

AI Stocks Drag as Valuation Fears Resurface: After a brief recovery, AI leaders retreated hard. The UBS US AI Winners Index dropped 3%, led by steep declines in Nvidia, Tesla, and Palantir. Investors are reassessing lofty expectations amid slowing macro data and a narrow leadership group driving the rally. While some view this as a necessary correction, others warn of volatility ahead, especially with key earnings still to come.

• Post-Earnings Moves Stir Volatility: Earnings reports continued to drive sharp single-stock moves. Datadog surged 23% on upbeat guidance, while DoorDash and Duolingo plunged on spending and growth concerns. Qualcomm's optimistic AI comments failed to lift its stock, suggesting investors are now more focused on execution than narratives. Snap rallied 10% on an AI partnership, showing selective enthusiasm for innovation remains.

Bond Rally and Dollar Weakness Reflect Shift in Sentiment: The 10-year Treasury yield fell to 4.09%, its biggest one-day drop in a month, reflecting increased conviction in rate cut bets. The dollar also weakened, further supporting a risk-off read on the day’s market moves. Investors rotated into fixed income as a potential safe haven, particularly as the labor outlook clouds growth expectations.

S&P 500 Sector Performance

Looking Ahead

With official economic data still delayed by the shutdown, markets will remain sensitive to alternative indicators and Fed commentary. The labor market is becoming a more central concern for policy direction, particularly as inflation pressures show signs of persistence. Investors are watching Nvidia’s earnings later this month as a potential inflection point for the AI trade. Meanwhile, fixed income and equity income strategies may gain traction as markets navigate heightened volatility and slower growth expectations.

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