3 Key Reasons Why Nasdaq and S&P 500 Fell Despite the US Shutdown Ending (Interest Rates, AI Bubble)

[In-Depth Analysis of the US Stock Market Drop]

Although the longest-ever US federal government shutdown ended dramatically, the market reacted with a sharp decline instead of relief. The day after the shutdown was lifted, the Nasdaq index plummeted by over 2% in the New York stock market, showing an unexpected market reaction. This article deeply analyzes the reasons why this decline stemmed from fundamental concerns about the macroeconomic situation and tech stock valuation, rather than simple profit-taking.

Nasdaq and S&P 500 Plunge After US Shutdown Ends: Analyzing the Unexpected Market Reaction and 3 Key Reasons

Normally, the end of a shutdown should act as a positive factor by resolving uncertainty, but this time, the market sentiment moved in a completely different direction. Why did the resolution of uncertainty cause stock prices to fall? According to the latest analysis, this drop is interpreted as a result of more fundamental concerns about the macroeconomic situation and tech stock valuation coming to the surface, rather than the short-term issue of the shutdown ending.

In this article, we analyze the three key reasons why the market fell despite the shutdown ending and diagnose what factors investors should pay attention to going forward.

1. Weakening Expectations for Interest Rate Cuts (The Federal Reserve's Policy Doubt)

The biggest downward pressure was the sharp decline in expectations for interest rate cuts by the US Federal Reserve (Fed). Wall Street's recent rally has heavily relied on the expectation that the Fed would continue its interest rate cut cycle to prevent a recession.

• Accumulation of Hawkish Remarks: Hawkish (favoring monetary tightening) comments from Fed officials, which were not announced during the shutdown or were overshadowed by the issue, were simultaneously reflected in the market upon the shutdown's resolution. This shook investors' confidence that an additional interest rate cut would be carried out at the December Federal Open Market Committee (FOMC).
• Uncertainty of Indicator Release: Important economic indicators, such as employment and inflation, which were delayed due to the shutdown, are soon scheduled to be released. The market is starting to worry that if these indicators still show a robust economy, it could give the Fed a reason to maintain an interest rate freeze or a hawkish stance instead of cutting rates. According to CME Group data, the probability of a December rate cut has rapidly dropped to the 50% level, unlike the previous period when it was close to 70%. As interest rate cut expectations weakened in this way, Treasury yields (10-year etc.) rose, exerting downward pressure on the stock market.

👉 Cause-Effect Framing: The weakening expectation of an interest rate cut directly leads to higher corporate funding costs and a decline in the value of future cash flows, which particularly impacted growth stocks like the Nasdaq index.

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2. AI Tech Stock 'Bubble' Controversy and Massive Sell-off (AI Bubble Concern & Tech Sell-off)

A distinctive feature of this decline was that the fall in tech stocks was much greater than in other indices. The sharp drop in the Nasdaq index was essentially caused by a massive sell-off of 'Magnificent 7' stocks, including Nvidia, and other Artificial Intelligence (AI) related stocks.

AI tech stocks led the market rally with explosive growth this year, but the 'AI Bubble Controversy', arguing that their valuation is excessive, has been constantly raised.

• Institutional Selling: News that SoftBank, a major Japanese investment company, sold its entire stake in Nvidia fueled concerns about overvaluation.
• Comparison with the Dot-com Bubble: The sharp rise of current AI-related stocks is being compared to the situation just before the collapse of the dot-com bubble in the early 2000s, severely dampening investor sentiment. Market participants heightened their vigilance against the risk of a potential bubble collapse, even in the face of the positive factor of the shutdown ending. Nvidia's stock price plunged over 3%, and other AI-related stocks, such as Palantir and Super Micro Computer, also fell, acting as a negative factor for the overall market.

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3. 'Buy the Rumor, Sell the News' Psychology in Effect

The end of the shutdown was an issue the market had predicted and already priced in. As news of the imminent end of the shutdown circulated over the past few days, the market already saw a slight rally ('Buy the Rumor').

However, once the shutdown was officially lifted, investors judged that there were no new positive factors to push the market higher and began to realize their profits ('Sell the News').

• Short-Term Profit-Taking Sales: Short-term investors who had bet on a prolonged shutdown or those who were waiting for the uncertainty to clear used this point as a selling opportunity, leading to a massive release of profit-taking sales into the market. This was particularly pronounced in volatile asset classes like tech stocks.

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4. Conclusion: What Matters is the Re-evaluation of Fundamentals

This decline following the end of the shutdown suggests that the market has returned to concerns about economic fundamentals and the fair value of assets rather than short-term political issues. Market volatility may increase further in the coming weeks as key economic indicators (employment, inflation, etc.) that were delayed by the shutdown are released. It is a time for investors to closely monitor the flow of this data, be wary of concentrated investment in specific sectors facing overvaluation debates, and prepare for potential market volatility through balanced portfolio management.

Key Summary:
The market decline after the shutdown ended was driven by the weakening expectation of an interest rate cut and the controversy over the valuation of AI tech stocks, beyond just short-term profit-taking. Investors should focus on the re-evaluation of economic fundamentals rather than short-term issues.

The content of this blog is for reference regarding investment judgment only, and investment decisions must be made under the individual's own judgment and responsibility. Under no circumstances can the information in this blog be used as evidence for legal liability concerning investment outcomes.