Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., November 14, 2025. REUTERS/Jeenah Moon

By Lewis Krauskopf

NEW YORK (Reuters) -The biggest U.S. stocks pullback in months is fraying investors' nerves ahead of tests to two underpinnings of the market's record-breaking rally: the artificial intelligence trade and expectations for interest rate cuts.

After a sharp and steady six-month climb, stocks have been sliding in November. The S&P 500 was last down on Tuesday over 3% from its late October all-time high, while the Nasdaq Composite had dropped about 6% from its peak from that time.

The S&P 500 on Monday closed below its 50-day moving average, a key intermediate trend indicator, for the first time since April 30. The Cboe Volatility Index, Wall Street's fear gauge, rose on Tuesday to its highest level in a month.

Several investors said the declines could be healthy for the bull market, to shake out speculative froth, with the benchmark S&P 500 still up over 30% since its low for the year in April. However, elevated valuations are keeping investors alert for signs of an "AI bubble," with high-flying technology stocks bearing the brunt of the latest weakness.

"Markets are needy of getting both reassurance the Fed is going to cut rates and also reassurance that the AI trade is not going to go south," said Tony Roth, chief investment officer at Wilmington Trust.

Investors have zeroed in for weeks on the quarterly report from Nvidia Corp, the world's largest company by market value, as a potentially pivotal moment for the AI trade. The semiconductor company, whose chips are central to the massive AI infrastructure buildout rippling through corporations, reports fiscal third-quarter results after the market closes on Wednesday.

"I can't think of a real reason to go in and buy aggressively until that's out of the way," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

With the U.S. government shutdown ending last week, investors are expecting a deluge of delayed official data to be released, starting with September's employment report on Thursday, and its importance for monetary policy.

The Federal Reserve had been expected to cut interest rates for the third straight meeting on December 10 in response to a labor market that showed signs of weakening ahead of the shutdown. But Chair Jerome Powell and other Fed officials have pushed back against expectations that a quarter-point cut was a done deal, and Fed funds futures as of Tuesday were indicating a roughly 50-50 chance of such a move next month.

"The nonfarm payrolls report will hold a whole lot of weight with policymakers, whether or not they need to move forward with additional easing," said Matt Stucky, chief portfolio manager, equities, at Northwestern Mutual Wealth Management. "So it definitely is a market moving event."

Lacking fresh government data during the 43-day shutdown, the longest in U.S. history, investors had little of the evidence they rely on to gauge the economy's health.

"I think a lot of people are worried that the data is going to be indicating a more protracted slowdown," said Robert Pavlik, senior portfolio manager at Dakota Wealth.

While a weak jobs number could shore up expectations of a December rate cut, "depending on how weak the numbers are, I guess you have to be careful what you wish for," Pavlik said.

Along with the pullback in stocks, gold and bitcoin, which also had put up strong performances since April, have fallen in recent weeks.

Such "froth" coming out of several assets "is a sign of how sentiment had just gotten very complacent, not just around AI, but around anything that was going up," said Marta Norton, chief investment strategist at retirement and wealth services provider Empower.

"I don't think it's a bubble because there's still enough fundamental health in the market," Norton said, describing it more as a "course correction."

The selloff is "very limited," said Johanna Kyrklund, group chief investment officer at Schroders. "It's just that we've got used to such a low level of volatility that is abnormal."

For example, the S&P 500's latest pullback has yet to remotely approach 10%, the level widely defined as a market correction.

Schroders remained optimistic about U.S. equities, Kyrklund said, describing the economic environment as benign during a briefing with reporters. "Valuations are expensive, but they can probably stay expensive for a bit longer."

Jim Carroll, a senior wealth advisor and portfolio manager at Ballast Rock Private Wealth who analyzes volatility and other trading signals, wrote in a commentary that cracks have formed in what is a longer-term uptrend.

"It's a really good time to gut check your exposure and get comfortable with the potential for a pullback more meaningful than one day or a week," Carroll said.

(Reporting by Lewis Krauskopf; additional reporting by Chuck Mikolajczak, Davide Barbuscia and Suzanne McGee; Editing by Alden Bentley and Richard Chang)