Investors are cashing out from this year's hottest stocks and shifting towards lower-valued, more defensive sectors.

Author: Wall Street Insight

The brief optimism brought by the end of the U.S. government shutdown quickly dissipated, with market focus shifting to a plethora of delayed economic data, uncertainty regarding the Federal Reserve's interest rate cut prospects, and concerns over high-valued tech stocks, leading to a widespread sell-off of high-valued tech stocks and risk assets.

On Thursday, October 13, the three major U.S. stock indices collectively fell during the day's trading, with the tech-heavy Nasdaq Composite Index closing down 2.29%.

The deterioration of risk sentiment also spread to the cryptocurrency market, with Bitcoin falling below the $100,000 mark and Ethereum briefly dropping over 10%.

The direct catalyst for this sell-off was the cautious remarks made by several Federal Reserve officials, suggesting that interest rate cuts should be approached with caution. According to data from the Chicago Mercantile Exchange (CME), the probability of a rate cut has plummeted from over 70% a week ago to around 50%.

This shift has intensified the market rotation that has been ongoing since the beginning of the month. Reports indicate that investors are cashing out from this year's hottest stocks and moving towards lower-valued, more defensive sectors, with this "risk-off mode" being particularly evident in Thursday's trading.

U.S. Stocks Experience Largest Single-Day Drop in a Month

With the end of the U.S. government shutdown, the delayed release of economic data, and investors reassessing the Federal Reserve's interest rate cut prospects for December, U.S. stocks experienced their largest single-day drop in a month on Thursday.

U.S. stock benchmark indices:

The S&P 500 index closed down 113.43 points, a decline of 1.66%, at 6737.49 points.

The Dow Jones Industrial Average closed down 797.60 points, a decline of 1.65%, at 47457.22 points, moving away from its all-time closing high.

The Nasdaq index closed down 536.102 points, a decline of 2.29%, at 22870.355 points. The Nasdaq 100 index closed down 536.102 points, a decline of 2.05%, at 24993.463 points.

The Russell 2000 index closed down 2.77%, at 2382.984 points.

The VIX (Volatility Index) rose 14.33%, closing at 20.02, having peaked at 21.31 at 04:23 Beijing time before retracting some gains.

Tech Giants:

The Magnificent 7 index of U.S. tech stocks fell 2.26%, closing at 203.76 points.

Tesla closed down 6.64%, Nvidia down 3.58%, Google A down 2.84%, Amazon down 2.71%, Microsoft down 1.54%, while Meta closed up 0.14%.

Chip Stocks:

The Philadelphia Semiconductor Index closed down 3.72%, at 6818.736 points.

AMD fell 4.22%, TSMC down 2.90%.

Oracle closed down 4.15%, Broadcom down 4.29%, Qualcomm down 1.23%.

Several Federal Reserve Officials Make Hawkish Remarks, "Centrists" Begin to Waver

Several Federal Reserve officials have made hawkish remarks, expressing concerns about inflation and taking a cautious stance on future interest rate cuts.

Cleveland Fed President Hammack (2026 FOMC voter) stated that inflation is expected to remain above the 2% target for the next 2-3 years. With the labor market weakening, the Fed's employment goal (the employment aspect of its dual mandate) is facing challenges. Tariffs are expected to push inflation higher and persist into early next year. The Fed needs to maintain a certain degree of policy restrictiveness to cool inflation.

Minneapolis Fed President Neel Kashkari stated on Thursday that he opposed last month's rate cut due to the resilience of the economy and is taking a wait-and-see approach regarding the December decision. St. Louis Fed President Alberto Musalem also reiterated that he believes monetary policy needs to "withstand" inflation.

Due to concerns about inflation and some officials believing the labor market remains robust, an increasing number of decision-makers are showing hesitation towards further easing of monetary policy, including some who were previously strong supporters.

The latest development is that Boston Fed President Susan Collins and San Francisco Fed President Mary Daly—both of whom voted in favor of rate cuts this year—have sent the clearest cautious signals to date. Collins stated that the "threshold for further easing in the near term is relatively high," while Daly indicated that it is too early to draw conclusions about the December decision, maintaining an "open mind."

The upcoming release of a large amount of data (which may bring more rather than less uncertainty), combined with the recent flurry of hawkish statements, has pushed the market's bets on a December rate cut back below 50%.

Two Possibilities for the December Meeting

Looking ahead to the December meeting, the outcome seems to be leaning towards "two options": either maintain the interest rate or cut it again by 25 basis points. According to Wall Street Journal reporter Nick Timiraos, another possibility is that the Fed may cut rates in December while setting a higher threshold for future easing through policy guidance.

Regardless of the final decision, Powell may face more dissenting votes than in the October meeting (where there were two dissenters). Evercore ISI Vice Chairman Krishna Guha wrote in a report on Thursday that Collins' clear opposition to a December rate cut "intensifies our concerns about Powell's ability to manage internal divisions within the FOMC."

Guha analyzed that if the Fed decides to cut rates, Kansas City Fed President Jeffrey Schmid may receive support from Collins and Musalem; if the Fed decides to hold steady, then Stephen Miran, who previously advocated for a larger rate cut, may vote against along with fellow board members Christopher Waller and Michelle Bowman, who also support easing.

This further highlights the deep rifts within the committee, making the December decision highly uncertain.

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