Markets Reel as Data Gaps and AI Hype Rattle Investors

The U.S. government shutdown may be over, but the economic ripple effects are keeping investors on edge. Missing data and soaring AI stock valuations are creating turbulence across equity and bond markets, sparking concerns that expected Federal Reserve rate cuts could be delayed.

The Nasdaq, sensitive to interest rate shifts, saw its largest drop in a month on Thursday, retreating about 4% from its October high. Pressure extended globally, with markets from Tokyo to London opening deep in the red, although the S&P 500 recovered slightly by the close. Even gold and bitcoin felt the strain, with bitcoin dipping below $96,000 for the first time since May.

Analysts point to a “frothy” market, driven by lofty valuations and elevated expectations. Compounding the issue is an information void: essential economic data, from crop estimates to employment figures, went uncollected during the 43-day shutdown. Key reports for October, including inflation data and jobless rates, are delayed, leaving investors navigating “like driving in the fog,” as some describe.

Federal Reserve policy faces uncertainty as well. After consecutive rate cuts in September and October, officials may pause in December due to limited data, tempering expectations for further monetary easing. CME’s FedWatch tool now suggests just a 46% probability of a December cut, down from near certainty a month ago.

Investor caution is also fueled by sky-high valuations, particularly in the AI and technology sectors. The S&P 500’s forward price-to-earnings ratio now sits at 22.8, above its 10-year average of 18.8. Stocks like Palantir, Oracle, and Nvidia have all logged notable losses in recent weeks, as investors weigh profits against continued uncertainty.

Corporate debt markets reflect similar caution. Oracle’s bond prices have dropped amid concerns over its substantial borrowing to fund AI infrastructure. Hedge funds, including Tiger Global Management, have also reduced exposure to major tech players, signaling cautious sentiment.

The shutdown’s lingering effects have amplified reliance on private surveys, which paint a mixed picture of economic health: consumer spending remains stable, but layoffs show spikes in certain sectors. With policymakers signaling restraint, and market optimism tempered by high valuations, volatility may continue for the foreseeable future.

Investors appear to be bracing for bumps ahead, balancing expectations of eventual rate cuts with the stark reality of incomplete data and elevated market risk.