Calm markets hit records on AI rally, Fed cut bets despite job data.

Despite a confluence of significant market events this week, including a highly anticipated Federal Reserve interest rate decision and a substantial triple-witching options expiry, financial markets are exhibiting unusual tranquility. This paradoxical calm, noted in a Bloomberg report, suggests the market has largely priced in immediate impacts and is instead fixated on nuanced signals from policymakers and economic data.

The Federal Reserve, under Chairman Jerome Powell, is widely expected to implement a 25-basis-point rate cut on Wednesday. While this move is largely discounted by traders, the crucial element will be Powell’s forward guidance during the subsequent press conference. Investors are scrutinizing for clues on the potential depth and speed of future rate reductions, with particular attention on upcoming labor market data, which could significantly influence the Fed’s trajectory. Key employment statistics expected in the coming weeks are poised to be pivotal in shaping market sentiment and policy expectations.

Current market positioning reflects a general expectation of minimal volatility. Citigroup projects a modest 0.72% movement around Wednesday’s Fed meeting and a 0.78% fluctuation for the October 3 nonfarm payrolls report. This subdued outlook stands in stark contrast to the heightened anxiety typically associated with such major economic announcements. Stuart Kaiser, head of U.S. equity-trading strategy at Citi, indicates that a substantial market jolt would likely require a more severe deterioration in employment figures, such as a sharp decline in payrolls or an unemployment rate approaching 4.5%.

Recent labor market indicators, however, have flashed some cautionary signals. Last week saw initial jobless claims reach their highest level in nearly four years, following a significant revision indicating 911,000 fewer U.S. jobs than initially reported between April 2024 and March 2025. Despite these cracks, Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, suggests the economy is experiencing a slowdown rather than an imminent “hard landing.” This nuanced view coexists with a notable shift in market sentiment, where the CME FedWatch tool now indicates a 76% probability of three rate cuts before year-end, a substantial increase from just weeks prior.

While the prospect of aggressive easing gains traction, some analysts advise caution. Garrett DeSimone, who leads quant research at OptionMetrics, highlights historical trends where emergency rate cuts often lead to initial positive intraday market returns, only to be followed by negative medium-term performance. This suggests the immediate market euphoria following a cut might be fleeting, requiring investors to consider longer-term implications.

Adding to the sense of calm, the quarterly triple-witching options expiration, valued at an estimated $5 trillion this Friday, appears to be losing its historical impact. This event, which sees stock options, index futures, and ETF contracts expire simultaneously, once generated significant market apprehension. However, DeSimone points out its influence has waned, particularly in periods of low volatility. Historical data spanning 35 years suggests S&P 500 intraday movements during expiration weeks are only marginally higher than subsequent weeks, challenging the notion that dealers unwinding positions leads to dramatic price swings.

Despite these underlying economic concerns and measured expectations for volatility, the broader equity market has continued its upward trajectory. The Nasdaq Composite recently surpassed 22,000, achieving its fifth consecutive record close. Similarly, the S&P 500 climbed past 4,600, and the Dow Jones Industrial Average reached a new peak of 46,000. This resilience is largely attributed to the robust performance of technology stocks, driven by the ongoing Artificial Intelligence (AI) rally. Oracle’s impressive AI backlog, for instance, has captivated traders, and strategists like Ulrike Hoffmann-Burchardi from UBS maintain a bullish outlook. UBS anticipates the S&P 500 reaching 6,600 by the end of 2025 and 6,800 by mid-2026, underscoring confidence in diversified exposure to the sector despite rising rate-cut bets and a weakening labor market.