Stocks Stumbled Again This Week—What’s Driving the Market Lower?

Key Takeaways

• The US stock market ended the week lower after a bumpy ride.
• The worst losses were again concentrated in tech and large-cap growth stocks, while healthcare outperformed.
• Anxiety about the AI buildout and uncertainty about the Fed’s next step weighed on investor sentiment.

Investors hoping for a quiet week in the markets were again disappointed, as worries about the artificial intelligence trade and the Federal Reserve’s next move continued to weigh on stocks. Strategists say that end-of-year rebalancing and algorithmic trading also likely contributed to the outsized moves.

The Morningstar US Market Index closed the week 1.93% lower. The worst losses were concentrated in tech stocks, with the Morningstar US Technology Index down 4.79%. Healthcare again outperformed with gains of 1.85%. Stocks remain about 4% lower than their most recent high at the end of October, but many strategists are still bullish.

A Volatile Week

Wall Street was treated to an especially volatile Thursday. Stocks surged at the beginning of the session, with investors seemingly invigorated by Nvidia’s NVDA strong third-quarter earnings results, as well as a superficially encouraging September jobs report. It was a very different story by midday, as stocks and other risk assets turned sharply lower. By the end of the day, the tech sector had lost 2.73%. Nvidia alone plunged 3.14%.

Cryptocurrencies also saw steep losses on Thursday. Bitcoin prices plummeted and are now down roughly 30% to less than $85,000 per coin, from a high above $124,000 last month.

Friday brought another rally, with the US Market Index gaining 1%. Small-cap value stocks rose 2.8%, while gains for the large-cap and tech categories were more muted.

AI Jitters Continue to Move Markets

In recent weeks, stocks tied to the AI trade have lost momentum after a blistering rally that began in the aftermath of President Trump’s April tariff announcements. They’ve been weighed down by worries that the sector won’t be able to live up to investors’ lofty expectations, and more recently, anxiety about the massive borrowing some mega-cap firms have undertaken to fund AI infrastructure projects. “AI is the dominant story for equity markets, driving most of the sentiment,” says Lara Castleton, US head of portfolio construction and strategy at Janus Henderson Investors.

Those worries broke the surface again this week, even as analysts took confidence from Nvidia’s earnings. Steve Sosnick, chief strategist at Interactive Brokers, described Thursday’s dramatic reversal as a sign of increasingly “brittle” sentiment. “If investors were truly enamored with Nvidia’s results and the assurances about the lack of an AI bubble, then by no means would we have succumbed to an algorithmic quirk so quickly,” he wrote Thursday afternoon.

As in previous weeks, analysts think that AI bulls buying the dip may have helped drive stocks higher on Friday.

A Cloudy Fed Outlook

The other driving factor for equity markets has been the pricing (and repricing) of interest rate cuts from the Fed. Janus Henderson’s Castleton points to a rally in small-cap stocks that gained steam earlier this year, when it looked like the Fed was poised to cut aggressively, then fizzled as those cuts were priced out of the market. Rate cuts often boost the stocks of smaller companies, which tend to carry more debt.

Financial markets dramatically reduced their expectations for a December cut over the past few weeks, amid increasingly hawkish comments from Fed officials. Lower rates mean cheaper borrowing costs, which are generally considered stimulative for stocks.

A muddy September jobs report did little to clarify the outlook for investors on Thursday, while more dovish comments from New York Federal Reserve President John Williams appeared to boost sentiment on Friday. In the bond futures market, the odds of a December rate cut shot up to more than 70%, according to the CME FedWatch tool, compared with roughly 40% a day earlier.

End-of-Year Trading May Be Moving Markets

Janus Henderson’s Castleton thinks the regular process of portfolio rebalancing likely also contributed to the week’s outsize market moves. She says that after a strong tech rally that has propelled major stock indexes to double-digit gains for the year, both retail and institutional investors have seen their portfolios perform very well in 2025. That means there’s plenty of opportunity to take profits from assets that have outperformed and reallocate them into other areas of the market.

“The second we finally got some volatility, you saw some movement [in the market],” as investors took gains off the table. Castleton points to new flows into fixed-income assets as an example. “I think a lot of [the movement in stocks] is year-end rebalancing and getting to a more neutral stance,” she says.

A similar dynamic may have compounded Thursday’s losses, according to Interactive Brokers’ Sosnick, who suggests the declines in bitcoin that preceded the selloff could be evidence that algorithms are using the relationship between stocks and the largest cryptocurrency to guide trading decisions. Bitcoin has “become such a proxy for speculation that I can’t be the only person using it as a signal,” he wrote.

What’s Next for Markets

Even accounting for Thursday’s stumble, many strategists are still bullish on the market overall.

“Looking forward, we believe that Fed rate cuts, robust corporate earnings, and the AI growth story will sustain the equity rally into 2026,” Ulrike Hoffmann-Burchardi, global head of equities at UBS Global Wealth Management, wrote in a Friday note to clients. After this year’s robust gains, “a period of derisking should not come as a surprise,” she said.

Mark Hackett, chief market strategist at Nationwide, describes this week’s action as a “release valve,” rather than a true reversal of the bull run. “Markets need recalibration and a reset in positioning—something investors may have forgotten after six months of relative calm,” he says. “The broader narrative hasn’t broken; it’s simply being tested right now.”

Castleton of Janus Henderson says the tech pullback in recent weeks is a reassuring sign that the market is not irrationally bullish on tech and AI. “It’s not that [investors are] driving everything up just because,” she says. “That gives me confidence that as long as the economy holds up on the other end, this bull market could be sustained.”