Panic selling sweeps the US stock market—is a turbulent start to November on the cards?

US stocks fell early this week before recovering, with gains from AI upstart Anthropic's initial public offering announcement and the Federal Reserve's decision to hold rates steady erased by concerns over the financing and financial returns needed to support the AI investment theme at the core of the US bull market.

Fed rate hike expectations edge slightly lower

Economic data released last week showed that despite tightening monetary policy, the economy remains strong, with demand and overall inflation heating up in tandem.

US third-quarter gross domestic product grew faster than expected, at an annualized rate of 3.4%, with consumer spending rising a strong 3.8% and business equipment investment up 20.9%.

Price pressures remain persistently high. The September personal consumption expenditures (PCE) price index rose 0.5% month-on-month, 0.2 percentage points faster than in August, while the year-on-year rate rose to 3.6% from 3.4% previously. Excluding volatile food and energy prices, core PCE inflation, which the Fed watches more closely, was 0.3% month-on-month and 3.1% over the past 12 months, still far above the 2% policy target.

Bob Schwartz, senior economist at Oxford Economics, told Yicai in an interview that the strong GDP growth reflects the continued AI boom, while other parts of the economy are also strengthening. "We expect economic growth to continue above market consensus next year, but it will increasingly depend on a capital spending boom driven by AI, defense and a favorable inventory cycle. There is currently little to change the Fed's judgment; they believe the economy and labor market remain resilient, which means the near-term focus will stay on inflation, and the rebound in September inflation supports the possibility of another rate hike at the Fed's upcoming meeting," he said.

The Fed held rates steady this week and said it needs more information before considering policy adjustments. Fed Chair Warsh said he was reluctant to describe the economy as "overheating," partly because it is difficult to estimate the economy's non-inflationary growth rate, especially amid productivity gains. Yet the new data may challenge Warsh's view, as key price pressure indicators surged and strong consumer spending and business investment drove growth well above what most central bank officials consider sustainable.

Capital market volatility has somewhat cooled expectations for Fed policy. Federal funds rate futures pricing shows the probability of a December rate hike has fallen to 78% from 91%, and 71 basis points of tightening is expected through September next year (down 5.2 basis points from Thursday).

Deutsche Bank believes Warsh returned several times during the press conference to the theme of strong growth, and although he continued to avoid forward guidance, his remarks reinforced the signal from the September SEP, when the vast majority of the FOMC expected another rate hike before year-end. The bank continues to expect the Fed to raise rates by 25 basis points in December and March.

Schwartz told Yicai that September inflation deviated from the Fed's 2% target. The spillover effect of higher energy costs into core prices, combined with strong AI investment demand, will keep the Fed vigilant and may lead to two more rate hikes. However, eventually falling energy prices and a ultimately non-inflationary labor market will curb price pressures by the end of next year, creating conditions for a subsequent policy shift.

Market alarm not yet lifted

Amid a late-session selloff, both the Nasdaq and the S&P 500 posted a third consecutive weekly decline, with the Nasdaq down 7.8% since hitting a record closing high on October 6.

Dow Jones market statistics show that the two S&P 500 sectors that fell this week were communication services and information technology, down 8.5% and 1.8% respectively, with communication services recording its largest monthly drop since April 2022. Money rotated into defensive sectors, with health care leading, up 3.1%, followed by materials and utilities, each up about 2%. The sharp decline in tech stocks stemmed from disappointing quarterly results from Intel and Amazon released Thursday evening, with Intel plunging 28.6% on Friday and shedding more than $140 billion in market value.

Data provided by LSEG to Yicai shows that US equity funds saw net outflows of $6.65 billion last week. Institutional investors showed extreme risk aversion, with net outflows from a single stock reaching a record $14.8 billion, and institutional net selling in a single week was the 10th largest peak since 2008. Bank of America said communication services recorded the largest weekly outflow since records began in 2018, while technology saw net outflows of $1.9 billion in a single week, the largest outflow since June 2026.

Looking ahead to the coming week, Wall Street expects the market overall to show a pattern of high short-term volatility and fierce tug-of-war between bulls and bears. Investors will face key tests including earnings and midterm elections, and after short-term turbulence there may still be structural opportunities in the year-end market.

Deutsche Bank believes US stocks are at the low point of the year's final round of declines. According to historical seasonal patterns since 1928, after bottoming in late October of midterm election years, the following three months are highly likely to see a rally.

Goldman Sachs is relatively cautious, believing the Fed will most likely resume a 25 basis point rate hike in December, that upside inflation risks have not been fully removed, and that the high-rate environment will continue to weigh on tech sector valuations. Morgan Stanley believes US stocks must clear three major hurdles before the next rally, and the S&P 500 may fall back to the 7100-7200 range before starting a sustained advance, while maintaining its year-end target of 8000.