The day Wall Street remembered gravity: AI, rate cuts and what it means for investors

Key takeaways:

Fog, fear and a big red day

On 13 November, Wall Street snapped out of its calm spell. All three major indices fell around 2%, with the tech-heavy Nasdaq hit the hardest. After weeks of steady gains, it felt like the market suddenly remembered that prices can move down as well as up. The volatility index, often called Wall Street’s “fear gauge”, jumped back toward its long-run average. In simple terms, investors started to price in more doubt and faster swings.

At the centre of it all sat two stories colliding. First, an AI-led sell off, with market darlings finally giving back some of their huge gains. Second, a sudden rethink of how likely it is that the Federal Reserve (Fed) will cut interest rates again in December, after weeks of assuming another cut was almost guaranteed.

When the AI superstars blink

Artificial intelligence has powered much of this year’s optimism, so it was no surprise that the same names led the pullback. Big AI beneficiaries such as Nvidia, Broadcom, Oracle and Palantir all dropped by roughly 4% to 7% on the day. These are still strong businesses with real revenues, but their shares trade on very high expectations.

When the story shifts even slightly, or when interest rate hopes cool, the most richly valued parts of the market feel it first. These companies have powerful growth stories and real revenue behind the buzz. The problem is simple: when prices assume almost flawless execution and very cheap money ahead, even a small change in the story hits valuations hard.

Think of these shares as very long projects. Most of their expected profits sit far in the future. When markets start to doubt how low interest rates will go, or how smooth future demand will be, those far-away profits get discounted more heavily. In plain English: the bar moves higher, and the share price moves lower.

From sure thing to coin flip

The second shock came from the interest rate world. A basis point (bp) is one hundredth of a percentage point. A 25 bp cut means interest rates fall by 0.25 percentage point.

In October, futures linked to Fed policy were pricing a December 25 bp rate cut as almost a done deal, with implied odds above 90% at one point. A week ago, those odds had slipped to roughly 70%. By yesterday, they were near a coin flip: around 50%, with some measures even lower.

Why the wobble? Two reasons.

First, a record 43-day government shutdown has frozen or delayed key economic reports on jobs and inflation. That leaves the Fed driving with fogged-up windows. Officials and markets are relying more on private surveys and partial indicators rather than the usual official data.

Second, several Fed officials have warned publicly against “moving too fast” on further cuts while inflation is still not fully under control and the data picture is blurry. One regional Fed president even compared policy-making to “driving in the fog” and argued for a slower pace.

Put together, that turns what looked like a simple path of repeated cuts into something more uncertain. Rate-sensitive assets, especially high-growth tech, adjusted in a hurry.

What this really means for long term investors

Days like this feel dramatic, especially when AI names that have been “only going up” suddenly fall in big numbers. It is tempting to see it as the start of a crash or proof that “the AI bubble has burst.”

A calmer framing is more useful.

First, this is standard market behaviour after a strong run. AI leaders have had a huge year. A 3% to 7% drop in a single day hurts, but it also resets expectations and cools some of the froth.

Second, volatility around rate expectations is normal when the Fed is not sure of its own next move. Futures markets are not oracles. They are opinion polls with money attached. As new comments and numbers arrive, the poll moves.

Third, your long term outcome is much more about your mix of assets and your behaviour than about whether the December meeting delivers a cut or a hold. Over a decade, a few big red days are almost guaranteed. What you do on those days is the real variable.

Risks worth watching, not obsessing over

There are real risks here, and it helps to name them clearly.

One risk is a policy mistake. If the Fed misreads the fog and either cuts too fast or stays too tight for too long, it could deepen a slowdown or keep financial conditions unnecessarily harsh. Early warning signs include a sharp rise in unemployment, a sustained fall in inflation expectations, or, on the other side, inflation re-accelerating while the Fed still talks about cuts.

Another risk is an AI spending cooldown. If big cloud and enterprise customers start to slow AI infrastructure projects or delay adoption, earnings expectations for AI leaders could come down. Watch capital expenditure guidance from major cloud providers and comments about AI project pipelines on earnings calls.

A third risk is confidence damage from the shutdown’s data gaps. If investors and policymakers feel they cannot trust the data for several months, swings in risk assets could become larger as everyone overreacts to partial information. Signs here include big intraday moves on small data releases and rising credit spreads, not just wobbly shares.

A simple investor playbook for days like this

You cannot control the fog or the Fed. You can control your process. A few practical steps:

• Set your risk budget in advance. Decide what percentage fall in your portfolio you can accept without panicking, and size your equity and AI exposure accordingly before the storm, not during it.

• Use rules to rebalance. When one area, like AI, has run far and then drops, pre-set rebalancing bands can help you trim strength and add after weakness in a disciplined way.

• Diversify your growth stories. Do not let a single theme, however exciting, dominate your future. Blend AI with other quality sectors such as healthcare, industrials or consumer staples so that different forces drive returns.

• Watch a few key dashboards, not every headline. For this episode, that means Fed cut odds, longer term bond yields and earnings guidance from major AI and cloud names.

None of these steps require you to guess what the Fed will do in December. They simply make your portfolio less dependent on being right about that one meeting.

When fog and hype meet, bring a map

Yesterday’s sell off was a reminder that even the brightest stories can flicker when expectations run ahead of reality and the policy backdrop changes. The combination of AI hype and data fog around Fed decisions made for a rough day.

For long term investors, the lesson is not to flee volatility, but to prepare for it. A clear plan, sensible diversification and a simple set of rules often beat hot takes and hurried trades.

The market will clear the fog in time. Your job is to make sure your plan still works, whether the next meeting delivers a cut, a hold or another surprise entirely.