(CNN) - Wall Street got the rate cut it wanted. But with the Federal Reserve set to take a more cautious approach to trimming interest rates in 2026, investors are now left to wrestle with other concerns that had been put on the back burner while Fed rate cuts were top of mind.
The Fed’s three consecutive cuts in September, October and December helped markets climb higher and look past nerves about artificial intelligence and uncertainty about tariffs.
With Fed Chair Jerome Powell telegraphing that rate cuts might be on pause for a while, Wall Street’s focus is turning elsewhere. And uncertainty that had been bubbling under the surface becomes harder to ignore when there isn’t Fed rate-cut optimism to help boost stocks.
Lingering concerns about AI are resurfacing, while recent moves in the bond market are giving some investors pause.
AI reality check
One concern: While AI might not be in a bubble that’s about to burst, there is genuine uncertainty about just how profitable every company with enormous aspirations is going to be — and whether the spending taking place will be justified.
Wall Street is taking a more scrupulous look at AI companies’ earnings results. Oracle shares (ORCL) slumped 10.83% on Thursday after the company reported third-quarter results that just missed Wall Street’s expectations.
Oracle shares are down 39% since hitting a record high in September.
“Oracle is entering into the heaviest phase of its AI infrastructure buildout, and [the third quarter] highlighted the timing mismatch of buildout spend to revenue conversion,” analysts at Bank of America said in a note.
AI and tech stocks have helped carry the market higher in recent years. So when investors sell shares, it can weigh on the broader market.
Tech shares came under pressure on Thursday. Nvidia (NVDA) fell 1.53%, while Alphabet (GOOG) fell 2.27%, weighing on the Nasdaq, which closed lower by 0.25%.
Investors rotated into other sectors, pushing the Dow higher by 646 points, or 1.34%, to close at a record high. The S&P 500 gained 0.21% and also closed at a record high.
“We’re not surprised to see near-term optimism in the markets, given that the Fed continues to cut rates even though the economy is growing,” Chris Zaccarelli, CIO at Northlight Asset Management, said in an email.
“However, we think the rose colored glasses may come off once investors realize that the path to lower interest rates may take longer — or may not materialize at all — to the extent that they believe it will,” Zaccarelli said.
Bonds are hinting at trouble
Affordability — and the cost of living — are front and center in discussions about the economy. President Donald Trump continues to lambast the Fed for not lowering rates as fast as he’d like.
The Fed’s benchmark interest rate influences borrowing costs like credit card rates. But it’s long-term bond yields — like the 10-year Treasury — that influence borrowing costs like mortgage rates.
When the Fed cuts rates, bonds tend to rally, pushing down yields — and resulting in lower borrowing costs.
But the opposite recently happened: The 10-year yield just hit its highest level in three months before falling on Wednesday.
It’s a sign that investors could be nervous that inflation might be a more persistent issue. (So they demand a higher yield to compensate for that potential inflation eating into their return).
And it’s also a stark reminder that while Trump wants lower rates, the bond market will have the final say in determining key borrowing costs.
Other items on bond investors’ minds:
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Concerns about government debt burdens have not gone away.
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Bond yields are rising in Japan, signaling a trend of rising borrowing costs across the globe.
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Some investors have reservations about National Economic Council Director Kevin Hassett potentially becoming the next Fed chair.
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There is still uncertainty about the Supreme Court’s expected ruling on a wide swath of Trump’s tariffs.
“Bond investors aren’t following the Fed’s easing script,” Ed Yardeni, president of Yardeni Research, said in a note. “They remain concerned about large US federal budget deficits and mounting US debt. They can see that inflation remains above the Fed’s 2.0% target. They are also seeing soaring bond yields in Japan.”
Why does this matter?
To Matt Maley, chief market strategist at Miller Tabak + Co, AI and bond yields present two potential “headwinds” for markets as investors look ahead to 2026.
“As it becomes more and more evident (obvious) that the AI industry is not going to be as broadly profitable…or as quickly profitable…as the market is pricing in, it’s going to create some serious headwinds in our opinion,” Maley said.
Meanwhile, “just as important” for markets is the prospect that bond yields continue to rise, Maley said.
Higher bond yields broadly correspond to higher borrowing costs, which can constrain the spending and business activity that can help juice stocks. Meanwhile, higher bond yields can also pull investors away from stocks.
“This pattern of rising long-term interest rates is highly unusual when we look at the historical reaction during Fed cutting cycles,” Torsten Slok, chief economist at Apollo, said in a note. “The bottom line is that … investors across all asset classes need to think about why” this is happening.
And it’s occurring at a time when tech companies — like Oracle — are raising debt to help finance their aspiration for building infrastructure to support the AI boom. Those borrowing costs could rise if bond yields rise.
“We believe that 2026 is going to face some real problems,” Maley said.
By John Towfighi
