Stocks Slip as Volatility Surges Post-Holiday: Eyes on Fed's Powell Amid AI Concerns

Meanwhile, Nvidia's market cap shuffle reflects AI enthusiasm, and Honeywell's $2 billion Deal is in Focus Amid Rising Geopolitical Tensionsmm

• Market volatility is rising post-holiday; and testimony from the Fed's Powell on AI will be scrutinized.

• Nvidia's market cap fluctuation underscores AI sector enthusiasm amid profit expectations.

• Honeywell's $2 billion aerospace deal highlights defense sector activity in the face of global geopolitical shifts.

Yesterday, following an unusual midweek holiday, the stock market experienced a slight decline. The S&P 500 dropped by 0.25%, while the Nasdaq Composite saw a more pronounced decrease of 0.8%.

Market volatility, as measured by the VIX, increased by 6.41%, closing at 13.28. This uptick raises the question of whether it could presage a more turbulent quadruple witching expiration day, where multiple types of financial derivatives, including equity options and futures, are set to expire.

Holiday volatility

Earlier in the week, concerns were voiced about heightened midweek volatility because of the holiday, and yesterday's trading seemed to validate those concerns. The shortened trading week can compress the timeframe for strategic adjustments or rolling over options trades to subsequent months, potentially amplifying market movements. Whether the volatility observed yesterday will carry over into today remains to be seen, especially with key economic data releases scheduled.

This morning, the latest purchasing managers’ index (PMI) data for both the services and manufacturing sectors will be published, providing insight into economic activity trends. Additionally, updates on existing home sales are anticipated. However, the highlight of the day is expected to be Federal Reserve Chairman Jerome Powell's testimony before Congress on the Fed's Monetary Policy Report. While no significant shifts in interest rate stance are expected, Powell's remarks could trigger market reactions given their proximity to the upcoming personal consumption expenditures (PCE) report, which could influence future monetary policy decisions.

Enthusiasm greets AI

Artificial intelligence (AI) has been dominant theme in the stock market this year. Nvidia (NVDA), celebrated as a leader in AI technology, briefly surpassed Microsoft (MSFT) in market capitalization earlier this week, only to see its shares retreat by 3.5% yesterday, falling below Microsoft once again. This fluctuation underscores a broader observation: while enthusiasm for AI is widespread, few companies besides Nvidia currently derive substantial direct profits from AI applications. Instead, for most firms, AI investments represent a future potential rather than immediate profitability. This dynamic echoes the dot-com era of the late 1990s when investments in online infrastructure far outpaced immediate returns.

Looking ahead, alongside the impact of Powell's testimony and the derivatives expiration, attention is also on Honeywell (HON) following its announcement of a significant acquisition. Honeywell revealed a $2 billion cash deal to acquire CAES Systems (CAES), a move aimed at bolstering its presence in the aerospace and defense sector. Against the backdrop of renewed geopolitical tension, highlighted by recent agreements between Russia and N orth Korea, defense-related investments are gaining prominence. As such issues continue to influence markets, maintaining focus on long-term investment strategies remains prudent amid evolving global dynamics.

While yesterday saw modest declines in major indices and heightened volatility, today's focus shifts to economic indicators, Powell's congressional testimony, and corporate developments such as Honeywell's strategic acquisition. Amid these developments, cautious optimism coupled with strategic adherence to investment plans appears advisable in navigating current market complexities and anticipating future opportunities and risks.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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