To The Moon

Powell’s Warning and Market Reaction

Jerome Powell’s remarks about “quite high” U.S. stock valuations acted as a sentiment shock. Investors are sensitive when valuation concerns come from the Fed chair himself, as it suggests policymakers are aware of asset-price froth. The swift sell-off was not about new data, but about credibility—Powell’s words undermine investor confidence in stretched multiples.

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Valuation Context

The S&P 500 forward P/E is trading well above its long-term average, pricing in strong earnings growth and continued AI-driven optimism.

Elevated multiples make equities vulnerable to any disappointment—whether in earnings, economic data, or Fed policy.

However, unlike 2022, inflation has moderated, and the Fed has already begun easing, limiting the case for a deep valuation-driven sell-off.

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Historical Seasonality

Historically, U.S. equities show a “Santa Claus rally” effect—indexes often rise in November–December, supported by year-end positioning, lighter volumes, and investor optimism.

Even during high-valuation environments (e.g., late 2017, 2021), markets tended to climb into year-end before correcting in Q1 of the following year.

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Near-Term Outlook

Pullback Duration: Last night’s dip may extend in the short term (days to a couple of weeks) if investors reassess stretched multiples or await clearer earnings guidance.

Correction Risk: A 5–10% correction remains possible given valuations, but a deeper sell-off is less likely unless macro data sharply deteriorates.

Counterweight: Seasonal tailwinds, Fed cuts, and liquidity inflows could limit downside and re-anchor sentiment into year-end.

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✅ Conclusion: The pullback may persist briefly as valuations are digested, but unless a negative catalyst emerges, it is more likely a pause than the start of a deep correction. Seasonality and policy support argue for resilience into year-end, though volatility will remain elevated.