Tech Rally Stalls as Caution Rises Amid Geopolitical Tensions and Shutdown Uncertainty

Markets capped the week with modest gains but closed mixed on Friday as a late-day selloff in tech erased earlier momentum. The S&P 500 eked out a small gain to log a third consecutive record close, while the Nasdaq slipped as Palantir’s sharp decline weighed on the index. Optimism around AI and rate cuts remains, but investor sentiment is showing signs of fatigue amid growing geopolitical risks, mixed economic signals, and a government shutdown now in its third day.

Key Headlines & Market Movers

• AI Optimism Meets Reality Check: A flurry of high-profile AI deals earlier in the day, including a $40 billion data center acquisition and new partnerships involving Hitachi, Fujitsu, and Nvidia, initially pushed tech stocks higher. However, growing skepticism over valuations and lack of near-term profits triggered a late-day reversal. OpenAI’s $500 billion valuation and ongoing investor enthusiasm are raising concerns of froth, especially with sentiment indicators approaching “manic” levels.

Geopolitical Tensions Weigh on Risk Appetite: President Trump’s warnings to Hamas over the Gaza conflict and threats to pull federal funding from Democratic strongholds injected fresh political uncertainty. The hawkish tone came as the shutdown entered day three, complicating economic policymaking and clouding the near-term outlook. Treasury pricing now reflects expectations for a prolonged shutdown potentially lasting up to a month.

Economic Signals Turn Softer: With the BLS jobs report delayed, private-sector data painted a picture of a cooling labor market, limited layoffs but tepid hiring and wage gains. Meanwhile, the ISM Services Index contracted for the first time since the pandemic, highlighting cracks in economic resilience. Despite the data vacuum, swaps markets are pricing in another Fed rate cut in October, even as Fed officials remain split.

Defensive Assets Outperform as Gold Shines: Gold posted its seventh straight weekly gain, outperforming tech stocks year-to-date. Central bank buying and lower real rates have supported the metal, even as AI hype dominates headlines. Crude oil rebounded Friday after Trump’s Middle East remarks, though it still ended the week below $61/barrel. The dollar weakened for the week, marking its worst stretch since August.

S&P 500 Sector Performance

Looking Ahead

Investor focus will shift to incoming corporate commentary and private data sources as the government shutdown delays key releases. With the Fed decision later this month, markets will be parsing alternative indicators for evidence of cooling inflation or labor market weakness. Meanwhile, geopolitical developments and continued AI deal activity will remain central to sentiment, though rising caution suggests the recent tech-led rally may be due for a breather.

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