Navigating Sentiment Shifts, Sector Rotation, and Policy Uncertainty

1. Shifting Sentiment. After a strong multi-month rally, markets finally saw a modest correction this past week. The S&P 500 is down roughly 4.4% from its recent highs, yet still up an impressive 31% from the April lows. A cluster of indicators now reflects deep investor caution: the Fear & Greed Index has fallen to 7, nearing the extreme pessimism boundary, the S&P Oscillator sits at –4, close to oversold territory (with –5 typically marking that threshold), and the VIX has risen 41% over the past ten days. Taken together, this kind of broad-based sentiment deterioration has historically created a backdrop for opportunity rather than a setup for prolonged downside.

2. AI Is Not a Bubble. A major driver of the recent correction has been the narrative that AI has entered bubble territory. The market’s reaction to NVIDIA’s results reinforced a view that positioning had become stretched, not that the fundamental story had broken.

Despite the recent rotation and questions around AI valuations, the underlying fundamentals across the AI, data center, grid, and power ecosystem remain exceptionally strong. A wide range of companies and sectors are still seeing significant activity in order growth, CapEx commitments, and backlogs that are growing at double-digit rates. Several industrial leaders tied to data-center construction, power infrastructure, and grid modernization continue to post some of the strongest backlog growth in the market. Quanta Services (PWR) backlog is up 18.4% year over year, Eaton (ETN)is running up 17%, GE Vernova (GEV) is up 15%, and Vertiv (VRT) is up 30% year over year.^[1]

3. Rotation is Healthy. Most importantly, the correction hasn’t happened in a vacuum. We are seeing rotation, not liquidation. Capital is moving into healthcare, housing-linked names, autos, and select consumer discretionary stocks. The consumer remains resilient, though selective. Large retailers like Walmart (WMT), Amazon (AMZN), Costco (COST), TJX Companies (TJX), and even Gap Inc. (GAP) continue to see strong demand trends, even as other categories weaken. Autos and housing remain more rate-sensitive, but industrial supply-chain commentary suggests the auto cycle is beginning to turn, albeit slowly.

4. Fed Uncertainty. Another source of volatility has been shifting expectations for a potential December rate cut. Markets pulled back on concerns the Fed may hold steady, but commentary from New York Fed President John Williams today reopened the door to a cut, saying, “I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.”

Despite ongoing debate around the timing of rate cuts, the economy is not signaling an urgent need for one. While monetary policy is arguably more restrictive than necessary, the economy is strong enough that a rate cut is not essential. If the Fed does choose to cut, it would be helpful, but not because conditions demand it. Growth remains robust, with the Atlanta Fed’s GDPNow tracker holding at 4.2% which reflects not only the surge in AI-related investment, but also steady contributions from the consumer. Inflation is still somewhat elevated, and the labor market is cooling, not collapsing, but it remains fundamentally healthy. Last week’s jobless claims underscored that stability, with the four-week moving average falling to 224,250, down 3,000 from the prior week.

5. Upcoming. Last week, we were told that October CPI will not be released, creating an unusual gap in the inflation narrative and forcing markets to shift their focus directly to the November data. Even without CPI, there are still meaningful economic signals ahead. The durable goods report will offer insights into new orders placed with U.S. manufacturers, and the PCE Deflator, which is the Fed’s preferred inflation gauge and expected to come in around 2.9%.

Earnings season also continues to provide important real-time reads on demand and investment. HP Inc. (HPQ), Deere & Co (DE), Workday (WDAY), Autodesk Inc (ADSK), and several others are set to report, giving investors incremental data across key areas of tech, software, industrials, and hardware.

6. Fixed Income. U.S. Treasury yields declined across the curve last week as investors digested delayed economic releases stemming from the recent government shutdown and recalibrated expectations for the Federal Reserve’s policy trajectory. By week’s end, the 2-, 10-, and 30-year yield had fallen by 9, 8, and 3 basis points, respectively. Corporate credit spreads widened across both investment-grade and high-yield last week. Investment-grade spreads widened 3 basis points to +122, while high-yield spreads widened 10 basis points to +362. In the municipal market, tax-exempt yields were higher by 1-2 basis points across the curve.^[2]

Stephanie Link’s TV Schedule:

Return for Selected Indices^[3]

Sources:

^[1] Bloomberg: As of November 2025

^[2] Bloomberg: As of November 23, 2025

^[3] Source: Bloomberg. As of November 23, 2025.

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