NEW YORK (Reuters) -Stock market investors are preparing for a turbulent year-end sparked by uncertainty over near-term Federal Reserve interest rate cuts and mounting worries that artificial intelligence companies, which have propelled the market to new records this year, are overvalued.

The market continued to slide this past week, despite equity indexes rebounding sharply on Friday. As of Friday's close, the benchmark S&P 500 index and Nasdaq Composite were down 4% and 7% respectively from their late October record highs.

After a relentless rally since April driven by AI excitement and expected rate cuts, market exuberance this week gave way to caution, with investors warning of more choppiness into the holiday season as doubts grow over those two key themes.

"It's certainly approaching what looks like is going to be a volatile holiday season," said Eric Kuby, chief investment officer at North Star Investment Management in Chicago. 

"Without a rate cut ... and with this renewed fear out there, it seems like it's going to be a much more difficult holiday season than we had hoped before."

LINGERING VOLATILITY EXPECTED

Volatility picked up dramatically this week, with the Nasdaq and S&P 500 on Thursday experiencing the biggest intraday swings since U.S. President Donald Trump's "Liberation Day" tariff announcement in April sent markets spiraling. 

Despite a modest retreat on Friday, the Cboe Volatility Index, known as Wall Street's "fear gauge," remains above the key 20-level, suggesting persistent investor anxiety.

The VIX futures curve - a snapshot of volatility expectations over coming months - also appears unusually flat, signaling market expectation for lingering volatility.

Still, many investors have said a pullback was overdue after the S&P 500 soared 38% from its April year-to-date low through late October. Following Thursday's tumble, the index was 5% down from its October high, its first 5% pullback in 149 days, said Keith Lerner, chief investment officer at Truist Advisory Services. By comparison, there has been an average of 77 days between pullbacks of at least 5% since 2010, Lerner said.

The S&P 500's price-to-earnings ratio, based on earnings estimates for the next 12 months, had dipped to 21.8 as of Thursday, down from 23.5 about a month ago, according to LSEG Datastream. But that current valuation still stood well above its 10-year average of 18.8.

"You're resetting those high expectations," Lerner said. "That likely has maybe a little bit more to go as far as just people having more doubts and uncertainties."

Meanwhile, retail investors who bought the dip following April's tariff swoon and have helped the market bounce back from selloffs, are showing signs of fatigue.

"While we are not seeing retail investors contributing to the selloff, they are also not showing strong buy-the-dip interest," JPMorgan analysts wrote in a note on Thursday.

FED RATE CUT UNCERTAINTY

A crucial uncertainty set to dog markets in coming days is whether the Fed will cut rates at its December 9-10 meeting, a move seen as a done deal up until late last month.

Investors were divided over the implications of Thursday's delayed jobs data release for September, the last employment report before next month's meeting. It showed payrolls growth accelerated but the unemployment rate also hit a four-year high.

New York Fed President John Williams appeared to lift hopes on Friday, saying the central bank can still cut "in the near term," but by late Friday market bets of a cut next month were barely higher than a coin flip.

"It could very well be the case that we don't get a change in the overall tenor until the Fed is more in a clear rate-cutting mode again," said Yung-Yu Ma, chief investment strategist at PNC Financial Services Group. "That's going to happen sooner rather than later, but it may not happen by the end of the year."

Tech stocks, which have led the bull market that began over three years ago, have been at the heart of the recent selling, with heavy declines in stocks such as Oracle and Palantir Technologies ( PLTR ) that had been big winners of the AI trade.

Strong earnings on Wednesday from AI bellwether Nvidia ( NVDA ), whose chips have been central to the AI infrastructure buildout, failed to calm nerves, with the stock even falling on Thursday after its report.

"That tells me that investors have been a little bit skittish and I think they just need to regroup here," said Don Nesbitt, senior portfolio manager at F/m Investments. 

POTENTIAL OPPORTUNITIES

The year-end period typically has been upbeat for stocks and some investors say there still could be reason for holiday cheer. December has ranked as the third-best-performing month of the year, with the S&P 500 rising an average of 1.28% since 1928, according to LSEG data.

December's performance has been even stronger whenever November, historically the strongest month, has posted declines, according to data since World War Two tracked by Sam Stovall, chief investment strategist at CFRA. In such cases, December has shown nearly double its average historical gains.

Some investors said they saw opportunities. Due to elevated valuations, Nesbitt says he has been underweight the information technology sector, but it is "starting to look a little bit more attractive."

Jack Ablin, chief investment officer at Cresset Capital, said investors are often reluctant to sell their winners in December to forestall paying taxes on capital gains.

"I don't think investors want to run from the markets," Ablin said. "What they want to really do is dig in and find opportunities."