The stock market's been on a tear lately, with the Dow, S&P 500, and Nasdaq all posting solid gains. We're talking the best Thanksgiving week performance in at least 13 years, according to preliminary data. The Dow closed at 47,427.12, the S&P 500 at 6,812.61, and the Nasdaq at 23,214.69. That's a two-week high across the board. The Russell 2000 also saw a bump, closing at 2,486.12.
AI Hype & Rate-Cut Dreams: Mirage or Oasis?
The AI Mirage and Rate-Cut Dreams
What's driving this rally? Two main factors seem to be at play: renewed enthusiasm for AI and the increasingly widespread expectation of interest rate cuts from the Federal Reserve. The market-implied likelihood of a December rate cut is hovering around 85%. Ross Mayfield at Baird notes that AI skepticism wasn't "durable," and that the shift in rate-cut expectations has been a catalyst.
But here's where things get interesting. Are investors fully considering the data, or are they getting caught up in the hype? It's like chasing a mirage in the desert – looks promising from a distance, but might disappear as you get closer. The market seems to be pricing in a dovish Fed, potentially even rate cuts stretching into 2026. This level of optimism seems divorced from reality. Have we seen concrete confirmation that inflation is dead and buried? Or are we simply *hoping* for the best? And if the Fed *doesn't* deliver those cuts, what happens to this rally?
Market Hopes vs. Hard Data: A Reality Check?
Digging Deeper: A Methodological Critique
It's crucial to consider how these market-implied probabilities are calculated. They're derived from futures contracts, specifically those tied to the Federal Funds rate. Now, these contracts reflect the collective *expectation* of market participants. They don't necessarily represent the Fed's actual intentions or even the most likely economic scenario. This is the part of the report that I find genuinely puzzling. Are investors confusing market sentiment with actual economic forecasts?
Furthermore, the data itself is subject to revisions and interpretations. Preliminary data, like that cited for the Dow's closing level, is just that – preliminary. The final numbers could shift, potentially altering the narrative. How much of this rally is built on a foundation of sand, waiting for the tide of revised data to wash it away?
The reliance on "market-implied" probabilities is also a bit circular. The market *expects* rate cuts, and that expectation drives the market higher, which in turn reinforces the expectation. It's a self-fulfilling prophecy, at least until reality intervenes. The question is, what happens when the Fed doesn't play along?
Consider the AI angle as well. While AI undoubtedly has long-term potential, the current market enthusiasm feels…premature. Are companies generating substantial profits from AI *today*, or are investors simply betting on future possibilities? It feels like we are in 1999 again, but instead of Pets.com, we have AI-dot-com.
The Mirage May Vanish
The stock market's recent gains are undeniably impressive. But a healthy dose of skepticism is warranted. The rally appears to be fueled by hope and expectation, rather than cold, hard data. While AI holds promise, and rate cuts are certainly possible, investors need to be realistic about the potential for disappointment. Because when that mirage vanishes, the market may be in for a rude awakening.
