Fresh doubts over AI profitability collide with a divided Fed’s latest rate cut, raising volatility risks for 2026
MARKET INSIDER – The S&P 500 retreated Thursday, slipping 0.3% after coming within inches of a record, as a sharp sell-off in Oracle reignited fears that the AI boom may be outrunning near-term profitability. Nasdaq fell 0.7%, dragged down by weakness across megacap chipmakers, while the Dow Jones Industrial Average bucked the trend with a 0.6% gain.
Oracle plunged 14% after reporting weaker-than-expected revenue and outlining higher spending needs — a combination that heightened concerns about its mounting debt load. The miss sent shockwaves through the AI trade: Nvidia and AMD fell more than 2%, and CoreWeave slid 6% in extended trading. The sudden reversal underscored growing investor anxiety about how quickly hyperscale cloud players and chipmakers will be able to convert massive AI capex into sustainable earnings.
The tech stumble halted momentum from Wednesday, when the S&P 500 nearly broke a new all-time high following the Federal Reserve’s third rate cut of the year. The FOMC lowered borrowing costs by 25 basis points to a 3.5%–3.75% range and signaled a slower pace of future cuts, prompting a broad rally that lifted even small caps — with the Russell 2000 hitting a record close. Fed Chair Jerome Powell emphasized that policymakers are “well positioned to wait and see how the economy evolves,” noting that President Donald Trump’s tariffs have kept upward pressure on inflation.
Investors, however, remain divided over whether the path to lower rates will unfold as markets hope. Chris Zaccarelli of Northlight Asset Management warned that optimism may fade once traders digest the reality that the Fed may pause cuts earlier than expected — or stop altogether. Ellen Hazen of F.L. Putnam said conflicting economic data and an uncertain rate trajectory could fuel “higher volatility and risk premia” across equity markets heading into 2026.
AI exuberance and monetary-policy uncertainty now sit on a collision course. With tech valuations stretched and the Fed stepping back into observation mode, investors may find that the next leg of the rally depends on hard evidence that AI-driven spending is translating into real, scalable returns — not just promises.
