Market Psychology Shift: Fed Policy and AI Sector Reassessment

This analysis is based on Charles Schwab’s market commentary published on November 4, 2025 [1], which identified a significant shift in market psychology driven by Federal Reserve policy and AI sector reassessment.

The Federal Reserve’s October 29, 2025 decision to cut rates by 25 basis points to 3.75%-4.0% was met with negative market reaction despite being a rate reduction [2]. Market data shows broad weakness across major indices following this “hawkish cut”:

• S&P 500
  : Declined 1.3% from 6,890.59 to 6,801.10 between October 29 and November 4 [0]
• NASDAQ Composite
  : Fell 1.8% from 23,958.47 to 23,538.55 over the same period [0]
• Dow Jones
  : Dropped 1.0% from 47,632.01 to 47,171.57 [0]

The negative reaction stemmed from Chair Jerome Powell’s cautious forward guidance, indicating that December rate cuts “weren’t a sure thing,” creating uncertainty about future monetary policy [3]. Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, noted that investors were “negatively surprised that future cuts might be taken off the table” [3].

The AI sector, which has experienced extraordinary gains, is showing signs of valuation fatigue and profit-taking:

: Despite reporting “stellar” earnings according to Schwab analysis, the stock plunged 7.22% to $192.22 on heavy volume of 67.16 million shares [0]. The stock remains up over 300% from its 52-week low of $46.86, suggesting significant profit-taking after a massive run-up [0].

: The AI chip leader declined 2.30% to $202.11 on elevated volume of 73.62 million shares [0]. With a market capitalization of $4.92 trillion, valuation concerns are mounting despite strong fundamentals [0].

: Down 0.85% to $632.32, reflecting changing perspectives on AI spending [0]. The stock trades well below its 52-week high of $796.25, indicating ongoing valuation concerns [0].

: Showed relative resilience with a 0.70% decline to $513.42, but still participated in the tech sector weakness [0].

The AI sector’s massive gains have created extreme valuation levels that are now triggering profit-taking:

• Palantir’s P/E Ratio
  : At 436.86, suggesting unsustainable valuation levels [0]
• Sector Rotation Evidence
  : Capital is flowing into defensive sectors like Energy (+1.17%) and Basic Materials (+0.84%) [0]
• Global Market Context
  : The psychological shift extends beyond U.S. markets, with global equity markets showing a “decidedly cautious tone” [4]

Recent analysis indicates growing concerns about market concentration, with heavy reliance on a few mega-cap AI stocks creating systemic risk [4]. The rally in tech and AI stocks has raised questions about sustainability and “how much upside remains” [4].

1. Fed Policy Uncertainty
   : The hawkish tone despite rate cuts creates uncertainty about future monetary policy trajectory [2][3]
2. AI Valuation Bubble
   : Extreme P/E ratios and massive run-ups suggest potential for significant corrections [0]
3. Market Concentration Risk
   : Heavy dependence on mega-cap AI stocks creates systemic vulnerability [4]

1. Fed Communications
   : Changes in forward guidance and economic data dependencies will be crucial
2. AI Earnings Season
   : Upcoming earnings from major AI companies will test current valuations
3. Sector Rotation Indicators
   : Capital flows between technology and other sectors may reveal new opportunities
4. Economic Data
   : Inflation and employment metrics will heavily influence Fed policy decisions

The market psychology shift identified by Schwab analysis reflects broader concerns about AI valuation sustainability and monetary policy clarity. The combination of Fed uncertainty and AI sector reassessment suggests elevated volatility potential in coming weeks. Market data indicates that investors are rotating out of high-valuation AI stocks into more defensive sectors, while awaiting clearer signals on both Fed policy and AI spending trends for 2026.

[0] Ginlix Analytical Database - Market data and stock quotes
[1] Schwab Network - “Analyzing Market’s Change of Psyche in FOMC & A.I. Stocks” (YouTube video, Nov 4, 2025)
[2] Charles Schwab - “Fed Cuts Rates for the Second Time This Year” (Market analysis, Oct 29, 2025)
[3] CBS News - “Federal Reserve cuts interest rates by 0.25 percentage points” (Nov 2025)
[4] STL.News - “Global Markets Slip into Correction Mode” (Nov 4, 2025)