Shutdown Ends, Fed Wavers, AI Doubts Grow

The S&P 500 finished a volatile week up 0.08% as markets dealt with multiple competing forces: the end of the historic government shutdown, growing Fed uncertainty, and emerging questions about AI valuations.

The Shutdown's End—and Its Legacy

The longest federal shutdown in U.S. history ended when Congress passed funding legislation. The relief proved short-lived.

White House officials said critical jobs and inflation reports may never be released. Data collection was interrupted during the shutdown. Even if delayed data comes out, future reports will likely include more estimated numbers than normal. These data quality issues could persist for months. Investors and policymakers are operating with an incomplete picture of the economy.

Fed Policy in the Fog

Market expectations for the next rate cut collapsed from 95% probability to roughly 50%. That's according to CME FedWatch, which tracks what futures markets are pricing in. Chair Powell's recent comment suddenly matters more: future cuts are "not a foregone conclusion—far from it."

Multiple Fed officials struck cautious tones. The St. Louis Fed President warned of "limited room for further reductions." Even typically dovish members—those who usually favor lower rates—expressed caution.

Growing AI Skepticism

Two high-profile moves this week raised questions about AI stock valuations. Are current spending levels sustainable?

SoftBank sold its entire $5.8 billion stake in Nvidia. The company needs capital for ambitious AI projects. These include data center buildouts and a planned $30 billion investment in OpenAI. Chief Financial Officer Yoshimitsu Goto said the sale was about funding strategy, not doubts about AI chips. But the timing caught markets off guard. So did the decision to exit completely.

More pointed criticism came from Michael Burry. He's the investor profiled in "The Big Short" for correctly predicting the 2008 housing collapse. Burry's hedge fund bought put options—essentially bets that stock prices will fall—worth $1.1 billion against Nvidia and Palantir. That represents roughly 80% of his reported portfolio.

Burry's reasoning centers on accounting practices. He argues that major tech companies are playing games with how they report expenses. Here's how: When companies buy expensive equipment like AI chips and servers, they don't expense the full cost immediately. Instead, they spread that cost over the "useful life" of the equipment. This is called depreciation.

Burry claims companies are extending these useful life estimates. They used to assume AI chips would last roughly three years. Now they're stretching that to as many as six years. Why does this matter? Longer useful life means lower annual expenses. Lower expenses mean higher reported profits. Burry called this "one of the more common frauds of the modern era." He says it obscures the true economics of AI investments.

His position also reflects concerns about "circular financing." That's when tech companies invest in or lend money to partners. Those partners then turn around and spend that money buying services from the same companies. It creates the appearance of demand that may be artificially inflated. The question isn't whether AI demand is real. It's whether current spending levels will produce returns that justify trillion-dollar valuations.

Not everyone agrees with Burry. Industry executives pushed back hard. Palantir CEO Alex Karp called his position "batshit crazy." Analysts note that depreciation is just an accounting choice. Extending asset life doesn't change actual cash flows. It just shifts when expenses show up on income statements.

The market reaction was swift but mixed. Tech stocks sold off initially. The Nasdaq dropped more than 2% following Burry's disclosure. But stocks have since recovered some losses. This suggests investors are weighing multiple perspectives rather than accepting any single narrative.

Bottom Line

Markets are trading on speculation rather than hard data. Without economic reports and facing divided Fed views, investors lack their usual guideposts. The upcoming Fed meeting will include updated economic projections. But policymakers will be making critical decisions with incomplete information about where the economy actually stands.

Meanwhile, questions about AI valuations are forcing a reassessment. Whether you frame it as accounting concerns, circular financing, or simply stretched multiples—the core issue is the same. The technology itself isn't in doubt. What investors are reconsidering is whether current prices make sense. Do they adequately reflect the risks? The timeline to profitability? The competitive dynamics that will determine which companies actually capture value from the AI buildout?

That recalibration is happening now. Combined with data uncertainty and Fed division, it sets up a final six weeks of 2025 that could look very different from the first ten months.

Federal Reserve Bank Data

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