Volatility Returns as Fed Signals Caution

This week, the steady gains and unusually calm trading ended. Volatility has begun to creep back into the market. The shift has been most pronounced in high-multiple technology stocks and more speculative corners of the market, where investor enthusiasm has been stretched by lofty valuations. The market sentiment turned cautious after Federal Reserve Chair Powell reiterated in a Wednesday speech that the central bank remains firmly committed to returning inflation to its 2% target. While Powell acknowledged progress, he emphasized that the job is “not yet done” and that the Fed will “proceed carefully” based on incoming data. Investors interpreted his comments as a signal that rates may stay higher for longer, keeping pressure on bond yields and limiting enthusiasm in equity markets.

Government Shutdown Fears and History

Another concern hanging over markets is the possibility of a U.S. government shutdown next week. Democrats and Republicans are at a standstill over a government funding bill as the shutdown deadline approaches. Democrats want protections for healthcare programs, including ACA subsidies and Medicaid, while Republicans are pushing for a “clean” bill without those provisions. The White House has escalated tensions by telling agencies to prepare for permanent layoffs if a shutdown occurs, which Democrats call an intimidation tactic. Both sides are blaming each other, negotiations have stalled, and with time running out, neither party has shown willingness to back down. The threat of a shutdown often captures headlines because of the immediate impact on government workers, delayed paychecks, and suspended services. Yet when it comes to financial markets, shutdowns tend to be more of a nuisance than a true inflection point for growth or earnings. Investors generally recognize that shutdowns are political standoffs that eventually resolve, without changing the long-term trajectory of the economy.

Looking back, the market’s reaction to past shutdowns has been relatively muted. Since 1976, there have been more than 20 shutdowns or funding gaps of varying lengths. The longest occurred in late 2018 into early 2019, lasting 35 days. During that period, the S&P 500 rose about 10%, reflecting more of a rebound from a steep sell-off in late 2018 than any real concern over Washington gridlock. In fact, in about half of all shutdowns, the stock market has actually posted gains during the period. The explanation is that markets are forward-looking, and shutdowns, while disruptive to federal employees and some contractors, do not typically derail consumer spending, corporate profits, or monetary policy.

Economic Resilience and AI Investment

On that front, the economic data remains encouraging. U.S. GDP growth continues to surprise to the upside, with the economy expanding at a 3.8% annualized rate last quarter versus forecasts of 3.3%. The Atlanta Fed’s GDPNow model is tracking growth of around 3.3% for the current quarter. Corporate earnings are also on solid footing, with S&P 500 profits expected to rise about 8% from a year ago. These numbers reinforce the resilience of the U.S. economy despite tighter financial conditions.

In corporate news, NVDIA pledged to invest as much as $100 billion into OpenAI. This underscores the massive capital flowing into artificial intelligence, where expectations continue to build at an extraordinary pace. Some Silicon Valley veterans caution that today’s AI enthusiasm has shades of the late-1990s internet boom. The key difference is that today’s tech giants are flush with cash, and AI tools are immediately available for global use, unlike the internet build-out that required years of infrastructure spending before consumers could access it. This combination of scale, liquidity, and rapid adoption may help AI avoid the same kind of collapse that ended the dot-com era, though volatility in the sector is likely.

Trade Policy and Domestic Growth

Trade and tariff policy was back in focus this week. President Trump announced new import taxes, including a 100% tariff on branded or patented pharmaceutical products unless the company is actively building facilities in the U.S. starting October 1. The package also included heavy trucks, kitchen cabinets, and upholstered furniture. For pharmaceuticals, this push comes at a time when many of the biggest players have already committed serious money to building here at home. Drugmakers have outlined more than $350 billion in U.S. investment over the next decade, and several of these projects would qualify for exemptions under the new rules. These tariffs will bring more of the production chain back onshore. Supporters argue this can create jobs and strengthen U.S. manufacturing capacity, not unlike what we’ve seen in tech. Apple has expanded its U.S. commitments into the hundreds of billions, and both Google and Meta continue to announce multibillion-dollar projects for data centers and AI infrastructure. When policy changes, companies adjust quickly to align with it, and those dollars flow back into the domestic economy.

The goal of the new tariffs is to correct years of what many saw as unfair trade practices that left U.S. industries at a disadvantage. While tariffs are a tax, the bigger picture is about leveling the playing field and incentivizing long term investment here at home. That can mean some near term price adjustments, but the trade off is greater supply chain stability and more resilient domestic industries. Importantly, the tariffs are not nearly as onerous as originally feared, averaging in the 15% to 20% range, which makes them more manageable for businesses and consumers alike. According to Goldman Sachs, companies had been absorbing as much as 64% of tariff costs in recent years, but that is unlikely to continue. More of the burden will fall on consumers as production costs rise, and the risk is that building in the United States will be more costly than abroad. Still, this is not runaway inflation. It is a gradual adjustment to the real cost of building in America. The trade off is that higher costs come with stronger job growth, rising wages in the innovation economy, and a more resilient manufacturing base. Longer term, this dynamic may also help explain why interest rates on the long end of the curve could remain elevated, even as short rates fall if President Trump gains control of the Fed next year.

Infrastructure and Outlook

Energy and infrastructure demand are also part of the story. Companies are pouring billions into data centers, chip plants, and new factories. Building just one data center can cost $5–10 billion once you factor in land, construction, cooling, and energy needs. These projects are expensive, but they create thousands of jobs, add to local tax bases, and anchor long-term growth in the communities where they’re built.

Overall, markets are weighing a mix of caution around Fed policy and government gridlock against an economy that continues to grow faster than expected, earnings momentum that remains positive, and AI investment that shows no signs of slowing.

Have a great weekend!

Sources

Fed Inflation Target: 2%
Longest Government Shutdown: 35 days (2018-2019)
S&P 500 Performance During 2018 Shutdown: +10%
U.S. GDP Growth (Last Quarter): 3.8% annualized (Forecast: 3.3%)
Atlanta Fed GDPNow Growth Tracking: 3.3%
S&P 500 Profit Growth (Year-over-Year): 8%
NVIDIA Investment in OpenAI: Up to $100 billion
New Pharma Tariff: 100% (unless building in U.S.)
Drugmaker U.S. Investment Commitment: >$350 billion over next decade
Estimated Average Tariff Range: 15% to 20%
Tariff Costs Absorbed by Companies: 64% (Source: Goldman Sachs)
Data Center Construction Cost: $5–10 billion

Disclaimer

The information provided in this communication is for informational purposes only and does not constitute financial, investment, or legal advice. All content is based on data and sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Market conditions and economic factors are subject to rapid change. Past performance is not indicative of future results. The views expressed herein are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The author may hold positions in securities mentioned in this post.