ORLANDO, Florida - Warnings about Wall Street's excessive optimism, concentration risk, and frothy valuations have fallen on deaf ears for most of this year, leaving market-watchers wondering what, if anything, will cool the tech and artificial intelligence frenzy.

It turns out that it could end up being a plain old-fashioned shift in the interest rate outlook.

The S&P 500 and Nasdaq, buoyed by strong earnings and AI capex investment, have notched dozens of record highs this year, a remarkable feat given the uncertainty and poor visibility that have characterized the economic and policy landscape in 2025.

But both indices peaked on October 29, the day the Federal Reserve cut interest rates for a second consecutive meeting. Crucially, however, Chair Jerome Powell said afterwards that a third cut in December was not the "forgone conclusion" markets had seemingly thought it would be. "Far from it," he emphasized.

In the three weeks since, the line of Fed officials expressing their reluctance to ease policy again next month has lengthened.

The resulting shift in market-based rate expectations has been dramatic.

The probability of a December rate cut fell as low as 40% on Monday, according to rates futures markets, compared with over 90% before the Fed's October 28-29 policy meeting. The next quarter-point rate cut isn't fully priced in until March.

Many risk assets have responded in kind.

While the benchmark S&P 500 may only be down 3% since October 29, a lot of tech and AI bellwethers have been hit harder, with the Philadelphia Semiconductor Index's losses approaching 10%. Bitcoin, a reasonable proxy for wider risk appetite and speculative investment activity, is down 20%.

ALL EYES ON NVIDIA

There's often no obvious trigger for market corrections or reversals, and they are typically long in the making.

For example, former Fed Chair Alan Greenspan's famous "irrational exuberance" comment about the 1990s dotcom euphoria was in December 1996, but the bubble didn't burst until March 2000.

There's no suggestion that a repeat of the dotcom bust is unfolding now, but it does look like some air is coming out of today's inflated markets. And the Fed's hawkish steer seems to be a major catalyst, with many of the rate-sensitive AI and tech names that powered the boom earlier in the year now leading this mini swoon.

That's in line with long-held market thinking. When firms are expected to generate strong cash flows in the future – whether they be well-established megacaps or smaller startups – a sudden swerve in the path for monetary policy can alter perceptions of their current stock valuations quite substantially.

Look no further than chipmaker Nvidia, which recently became the world's first $5 trillion company - on October 29, no less - but has since seen its share price fall 10%.

Some of Wall Street's largest hedge funds have recently reduced exposure to this AI leader and other U.S. megacaps. Japan's Softbank said last week it had sold all its Nvidia shares for $5.8 billion, and tech billionaire Peter Thiel's hedge fund also disposed of its entire Nvidia stake in the third quarter.

The AI poster child releases its latest quarterly earnings after the market close on Wednesday. With the Fed seemingly about to put rate cuts on pause, the bar for another Nvidia results-led market jump may be high.

That's a reminder that even though many accepted market and economic rules have been thrown into doubt this year, the standard playbook hasn't been ripped up completely.

(The opinions expressed here are those of the author, a columnist for Reuters)

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(By Jamie McGeever; Editing by Jan Harvey)