Government Reopens, AI Stocks Slide On Supply Crunch Fears: This Week In Markets
News Summary
After the longest shutdown on record, the U.S. government has reopened, but key economic indicators, such as October jobs and inflation figures, may be permanently compromised due to a lack of data collection during the closure. This leaves the Federal Reserve in a cautious position ahead of its December policy meeting, with rate cut odds now evenly split between a 25-basis-point cut and a hold. On Wall Street, after the Dow Jones Industrial Average hit fresh record highs on Wednesday, momentum sharply reversed on Thursday as AI stocks led a tech sell-off. This was triggered by growing investor anxiety over supply-side constraints, particularly after AI cloud infrastructure firm CoreWeave Inc. missed third-quarter expectations. CoreWeave’s management warned of infrastructure delivery delays, stating that demand for its platform far outpaced the ability to build and deploy new capacity, leading analysts to label this a "backlog paradox" – unprecedented demand with no clear fulfillment timeline. CoreWeave shares tumbled 25% this week after having rallied 240% prior to earnings. Conversely, sectors tied to domestic demand and real economy activity, including healthcare and autos, showed relative strength as consumer spending optimism rebounded following the government reopening. Eli Lilly Co. and General Motors Co. were among the biggest gainers, both up about 25% over the past month. GM shares rallied to record highs near $73 on Thursday, capping a streak of gains, and are up 33% year-to-date, significantly outperforming the S&P 500's 14% and the Nasdaq 100's 18% gains.
Background
The U.S. government experienced its longest shutdown on record in 2025, leading to the closure of federal agencies and disruption in economic data collection. This event has had a direct impact on market confidence and the Federal Reserve's decision-making process, as the Fed heavily relies on accurate economic data for monetary policy formulation. Prior to the shutdown, markets were already divided on the timing of potential Federal Reserve interest rate cuts, while AI stocks had seen significant rallies throughout 2024 and early 2025, raising investor concerns about overvaluation. Concurrently, the incumbent U.S. administration under President Donald J. Trump is navigating economic policy amidst efforts to balance growth and inflation control.
In-Depth AI Insights
What are the deeper investment implications of the AI sector's "backlog paradox"? - This suggests a structural bottleneck in AI infrastructure, limiting the scalability of AI models and applications, rather than a mere temporary supply shortage. - Investors may need to re-evaluate the valuations of AI software and model development companies, as their growth potential could be constrained by the availability of underlying hardware and compute infrastructure. - Capital flows could shift from pure AI software/service companies towards those that can resolve infrastructure bottlenecks, providing critical hardware or cloud compute solutions. How will compromised key economic data affect the Federal Reserve's policy trajectory and market expectations? - Missing and uncertain data will increase the Federal Reserve's challenges in formulating monetary policy, potentially leading to a more cautious or delayed approach to rate cuts. - The Fed may rely more on forward guidance and qualitative assessments rather than quantitative data, making it harder for markets to interpret policy intentions. - Market volatility could escalate as a result, making it difficult for investors to predict interest rate trajectories and thus impacting the pricing of various asset classes. Is the relative strength of "real economy" sectors like autos and healthcare sustainable amidst increased tech volatility? - The resilience of these sectors reflects a flight to value and defensive assets during uncertain times, coupled with a temporary rebound in consumer confidence post-government reopening. - The sustainability of this trend will depend on the long-term resilience of consumer spending, the evolution of inflation, and the stability of the Federal Reserve's future interest rate policies. - If structural issues in AI persist and macroeconomic data remains ambiguous, a rotation of capital from high-growth tech stocks to stable-earning, reasonably valued real economy sectors could become a more prolonged theme.