Powell’s Valuation Warning: Stocks Are ‘Fairly Highly Valued’

• Federal Reserve Chair Jerome Powell acknowledged elevated equity valuations but stated that current conditions do not indicate heightened financial stability risks, following a quarter-percentage-point rate cut that spurred record highs in major stock averages.
• Markets dipped after Powell’s remarks but rebounded in premarket trading, driven by Alibaba’s (BABA) announcement to exceed its $50 billion AI investment target amid a $4 trillion global surge, boosting shares nearly 9% to $176.98.
• Micron Technology (MU) reported stronger-than-expected quarterly earnings, providing a positive signal for AI prospects and modestly lifting its stock, aligning with favorable borrowing conditions from lower interest rates.

Federal Reserve Chair Jerome Powell highlighted concerns over elevated asset prices, including stocks, during a recent speech, emphasizing that equity valuations appear fairly high by various measures. This observation comes amid the central bank’s efforts to calibrate monetary policy, with Powell noting that the Federal Open Market Committee assesses how its decisions influence broader financial conditions to align with intended economic outcomes. The recent decision to reduce the benchmark overnight borrowing rate by a quarter percentage point has fueled market optimism, contributing to a series of record highs in major stock averages as investors anticipate further rate adjustments.

Despite acknowledging these lofty valuations, Powell maintained that current conditions do not signal heightened risks to financial stability, suggesting a measured tolerance for such levels as long as they do not undermine economic goals. Markets, however, reacted with volatility following his remarks, as major averages shifted into negative territory, underscoring the sensitivity of investors to central bank signals. Powell also pointed out that financial markets actively interpret and incorporate expectations of future rate paths, which in turn affect pricing across assets like equities and mortgages.

In parallel developments boosting sentiment in the technology sector, Alibaba Group Holding Limited (BABA) announced plans to increase its artificial intelligence investments beyond the initial $50 billion target, a move aimed at maintaining competitiveness amid a global AI investment surge reaching $4 trillion. This commitment propelled Alibaba’s shares up nearly 9% to $176.98 in premarket trading, reflecting investor enthusiasm for the Chinese tech giant’s strategic pivot. Complementing this, Micron Technology, Inc. (MU) reported quarterly earnings that exceeded expectations, providing an additional uplift to AI-related prospects and modestly elevating its stock price.

These corporate updates align with broader trends where lower interest rates from the Federal Reserve can enhance borrowing conditions for innovation-driven firms, potentially accelerating advancements in AI and semiconductor technologies. Powell’s commentary on market dynamics illustrates the interplay between policy actions and investor behavior, where anticipated rate cuts often precede rallies in risk assets. While stocks dipped post-speech, the premarket rebound on the following day highlights resilience in sectors like technology, driven by strong fundamentals from companies such as Alibaba and Micron. Overall, the Federal Reserve’s focus remains on fostering sustainable growth without precipitating instability, even as asset prices test upper bounds.

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