The past week delivered an intriguing paradox for equity markets. Even as the federal government remained shuttered into its second week, major indices marched relentlessly higher, with the S&P 500 climbing 0.58% on Wednesday to close at 6,753.72 while the Nasdaq Composite advanced 1.12% to finish at 23,043.38, both notching fresh all-time highs. This resilience speaks volumes about where investor conviction currently resides: not in Washington’s ability to function, but in the enduring promise of artificial intelligence and the prospect of continued monetary easing.
The S&P 500 and Nasdaq Composite closed at record highs on Monday, spurred by optimism about increased mergers and acquisitions activity following AMD’s surge of more than 23% after a deal with OpenAI that could ultimately grant the ChatGPT parent a 10% stake in the chipmaker. The transaction crystallizes a narrative markets desperately want to believe: that the AI investment thesis remains robust enough to justify elevated valuations even as economic fundamentals grow murkier.
The week’s trading action unfolded against a backdrop of profound information uncertainty. The absence of the Labor Department’s monthly jobs report, scheduled for Friday morning, is the first casualty in what is likely to be a string of delayed economic data as the shutdown persists. This data blackout creates a particularly vexing challenge for the Federal Reserve, which must navigate monetary policy at a moment when inflation is running above its 2% target and hiring has nearly ground to a halt.
Fed minutes released Wednesday afternoon signalled more rate cuts could be in play for the rest of 2025, with a slight 10-9 majority favouring quarter-point cuts at each of the two remaining meetings this year. This dovish tilt suggests the Fed views labour market risks as outweighing inflation concerns, even as the shutdown eliminates the official employment data that would ordinarily inform such judgments. Markets have priced in a 100% probability of an October cut and an 88% chance of another in December, odds that have strengthened since the shutdown began.
What makes the current moment particularly fascinating is how markets have compartmentalized political dysfunction. Despite the government shutdown, investor sentiment has remained resilient, with the S&P 500 notching three additional all-time highs, bringing the year-to-date total to 31. Healthcare stocks surged 6.58% for the week, leading sector performance, demonstrating that fundamental sector rotation continues even as political theatre dominates news cycles.
The caution flags emerged from unexpected quarters this week, with Bank of England officials warning about prospects of a “sharp market correction” fuelled by speculation about artificial intelligence. These concerns highlight the tightrope markets currently walk: valuations predicated on transformative AI-driven productivity gains must deliver results that justify price levels that look extended by traditional metrics.
For investors navigating this environment, the week’s action underscores several realities. Markets have learned to look through temporary government disruptions toward underlying economic momentum and corporate earnings power. The Fed’s dovish posture provides a supportive backdrop that encourages risk-taking even amid uncertainty. The AI investment narrative retains sufficient conviction to drive significant capital allocation decisions, as evidenced by the OpenAI-AMD transaction and continued technology sector leadership. The test ahead will be whether economic data, once available again, confirms the resilience markets have priced in, or whether the shutdown masks deterioration that becomes apparent only once the data blackout ends.
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