A dramatic reversal unfolded in financial markets on the second day following the Federal Reserve's rate increase. Equities, bonds, and gold rallied in tandem, with AI chip stocks leading the tech sector higher. Short sellers faced a significant squeeze, and panic sentiment quickly dissipated.

On Thursday, the S&P 500 reclaimed its 50-day moving average, while the Nasdaq outpaced major indices as AI chip stocks, which had suffered the heaviest selling, rebounded strongly. Intel surged over 7.7% in a single day, Arm climbed 8.6%, and AMD advanced 6.5%.

Simultaneously, U.S. Treasury yields declined across the board. The 10-year yield erased the previous day's gains, and the 30-year yield dropped 8 basis points from Tuesday's close, underscoring a notable long-end bond short squeeze.

Spot gold jumped 2.3%, rebounding from a nearly six-week low hit the prior session to approach the $4,400 level.

Analysts attribute this rebound to three core factors:

First, falling crude oil prices alleviated concerns over energy supply disruptions, providing an initial improvement in risk appetite. Second, declining long-end yields signaled a marginal softening in market expectations for the rate hike trajectory, easing valuation pressures on capital-intensive sectors like data center construction. Third, forced short covering provided passive upward momentum for stock prices.

Goldman Sachs data shows the most heavily shorted stock basket jumped on Thursday, posting its largest single-day gain in six weeks. However, the bank's trading desk assigned a market activity score of just 4/10, suggesting this rebound may lack staying power.

Oil Pullback Opens Door for Risk Appetite

The starting point for Thursday's market moves was the overnight decline in crude oil prices.

Reports indicated Saudi Arabia proposed a two-week ceasefire to the Houthi rebels. Additionally, Chinese Foreign Minister Wang Yi expressed during talks with his Iranian counterpart on Wednesday that China hopes regional tensions do not further spill over toward Yemen and the Red Sea, calling for resolution through dialogue and negotiation.

These developments caused spot Brent crude to retreat significantly over the prior two days, easing some panic in the physical market.

U.S. WTI crude briefly fell below $100 a barrel, hitting an intraday low of $99.10, down nearly 3.3% on the day. Brent crude touched a session low of $101.53, down almost 4.1%, before paring most of its intraday losses.

Refined product prices were mixed, with gasoline reaching cycle highs while diesel prices plunged and heating oil also declined.

However, the fundamental supply-side risks remain unresolved. Rebecca Babin, senior energy trader at CIBC Private Wealth Group, noted that overall supply remains tight, providing price support, as the U.S.-Iran conflict continues to disrupt Middle East energy flows and the Russia-Ukraine situation remains unclear.

Arne Lohmann Rasmussen, chief analyst at Global Risk Management, stated: "We view this as a buying opportunity for crude and refined products. Prices have pulled back, but the underlying supply risks have not disappeared."

JPMorgan analyst Natasha Kaneva wrote in a note: "For the first time since the Iran conflict began, we have no base case forecast... We simply don't know how to model the outcome."

Long-End Yield Decline Backs the Market

On the second day after the Fed's hike, the bond market moved in the opposite direction of the rate increase.

Long-end Treasury yields led the decline, with the 30-year yield dropping 8 basis points from Tuesday's close, erasing the prior day's gains and accelerating into the close. Meanwhile, weak U.S. housing data reinforced cautious expectations for the economic outlook.

U.K. gilts also rallied, with long-end yields falling over 10 basis points, further supporting sentiment in the U.S. bond market.

Michael Chang, analyst at Citi, said: "The Fed has shown credibility in fighting the tail risk of inflation, which is a positive signal for bond investors. Long-term inflation expectations have fallen both yesterday and today, exactly reflecting this logic."

This rate hike marks the fourth tightening cycle of this century and the 15th since the mid-1950s. According to Deutsche Bank's historical data review, past rate cycles have averaged 22 months in duration (median 15 months), with an average cumulative hike of 478 basis points (median 313 basis points).

Current market pricing reflects an extremely restrained tightening path, with roughly 95 basis points of cumulative hikes expected over the next 12 months - which, if realized, would be the shallowest rate cycle in modern history.

However, history has repeatedly shown that the ultimate extent of a rate cycle is often difficult to predict at its outset, with final outcomes almost always exceeding initial market expectations. From the first hike, recessions have historically arrived on average about 3 to 3.5 years later, though the range is wide.

The probability of an October hike currently stands at around 55%, with December at about 75%. Whether this cycle has already peaked remains the biggest point of disagreement in the market.

AI Chip Stocks Emerge as Biggest Winners, Short Squeeze Dominates Trading

Behind Thursday's tech-led advance, the rebound in AI chip stocks was particularly striking.

The Philadelphia Semiconductor Index rose 3.14% to 11,599.05 points, making it the strongest major index of the day. Memory and logic chips strengthened in tandem. AMD gained 6.36%, SanDisk rose 6.21%, Micron advanced 5.50%, Marvell Technology climbed 4.81%, and Western Digital added 1.65%.

Gil Luria, managing director at D.A. Davidson, pointed out that falling oil prices and lower Treasury yields together "eliminated some of the concerns investors had after Wednesday's Fed meeting." He noted: "Data center construction is highly sensitive to interest rates, so any signal of reduced upside in rates is positive for data center expansion and semiconductor companies."

Goldman Sachs data reveals the session's gains were highly concentrated. The S&P 500 ex-AI-related components was essentially flat, still down nearly 1% from Tuesday's close, meaning the overall rebound was almost entirely driven by AI-related stocks rather than broad-based sector participation.

Moreover, the key mechanism behind Thursday's rally was concentrated short covering.

Goldman Sachs' trading desk observed a "squeeze bias" in the tape, with the most heavily shorted stock basket posting its biggest gain in six weeks.

Even the most beaten-down high-beta stocks from the past year surged alongside, indicating this move is purely a technical oversold bounce without fundamental capital positioning.

From a positioning perspective, this rebound occurred from a relatively "clean" starting point, with the market carrying almost no positioning burden beforehand:

Goldman Sachs data shows CTA strategy funds' U.S. equity long positions stood at just $37.3 billion, near the bottom of the past year's range. Fundamental hedge funds' net leverage has fallen to the 5th percentile - an extremely low level - implying substantial room for institutions to add positions. Sentiment is similarly depressed; Goldman cites the American Association of Individual Investors (AAII) survey showing the bull-bear spread at its most pessimistic level since May 2025, one of the lowest readings of the ChatGPT era.

However, Goldman Sachs Prime Brokerage data also shows hedge funds made substantial net sales of macro assets last week, the largest selling since February of last year.

This implies that while Thursday's sharp rally temporarily relieved systematic selling pressure, it is far from fully resolved. According to Goldman Sachs estimates, even if U.S. stocks trade sideways over the coming week, CTA funds would still mechanically sell approximately $30 billion in U.S. equities based on model signals.