[New York Stock Exchange] Nasdaq Falls 0.5% for Third Day Amid Caution Over AI Rally and Stock Overvaluation

S&P 500 Forward PER Hits 22.9 Over 12 Months
Highest Since Dot-Com Bubble and COVID-19 Era
Robust Q2 U.S. Growth and Weekly Jobless Claims Data
Treasury Yields Drop as Some Rate Cut Expectations Recede
Oracle Falls 5% on Wall Street Fo

On September 25 (local time), all three major indices on the New York Stock Exchange closed lower for the third consecutive day. Despite solid economic growth, concerns over the sustainability of the artificial intelligence (AI) rally and debates about stock overvaluation weighed on investor sentiment. The market's attention is now turning to the inflation data set to be released the following day.

On this day, the Dow Jones Industrial Average, which focuses on blue-chip stocks, closed at 45,947.32, down 173.96 points (0.38%) from the previous trading day. The S&P 500 Index, which is centered on large-cap stocks, fell by 33.25 points (0.5%) to 6,604.72, while the Nasdaq Index, which is dominated by technology stocks, dropped by 113.157 points (0.5%) to finish at 22,384.698.

By stock, Oracle plunged by 5.55%. The sell-off was triggered after Rothschild Redburn issued a report stating that expectations for Oracle's cloud business were excessively priced in, warning that the stock could fall by as much as 40%. Microsoft declined by 0.61%. Alphabet, the parent company of Google, dropped by 0.51%, and Meta, the parent company of Facebook, fell by 1.54%. Tesla also weakened by 4.38%. Remarks from Jerome Powell, Chair of the Federal Reserve, about "stock overvaluation" and growing caution over the AI rally put additional pressure on technology stocks overall. However, Nvidia rose by 0.39%.

This market decline occurred despite strong U.S. economic indicators. On the same day, the Bureau of Economic Analysis (BEA) under the U.S. Department of Commerce announced that the final figure for real gross domestic product (GDP) in the second quarter increased by an annualized 3.8% compared to the previous quarter. This figure exceeded both the preliminary estimate (3.3%) and the Reuters forecast (3.3%). The reduction in the trade deficit and a rebound in consumer spending supported the achievement of the highest growth rate in two years.

The labor market also remained robust. According to the U.S. Department of Labor on the same day, the number of new unemployment claims for the week of September 14-20 was 218,000, down by 14,000 from the previous week (232,000). This figure was also below the market expectation (233,000), somewhat easing recent concerns about a slowdown in the labor market.

However, debates over stock overvaluation dampened investor sentiment. According to Bloomberg, the S&P 500 Index's 12-month forward price-to-earnings ratio (PER) recently rose to 22.9, the highest level since the early 2000s dot-com bubble and the COVID-19 period in 2020 when the Federal Reserve lowered its benchmark interest rate to near zero, except for those two periods.

Chris Zaccarelli, Chief Investment Officer (CIO) at Northlight Asset Management, commented, "I agree that the economy is strong and growing, but much of the good news is already priced in," adding, "The biggest concern is valuation."

Meanwhile, there are ongoing disagreements within the Federal Reserve regarding the future path of interest rate cuts. Austan Goolsbee, President of the Federal Reserve Bank of Chicago, told reporters on this day, "We still need information to be confident that the rise in inflation is temporary," taking a cautious stance on additional rate cuts. In contrast, Michelle Bowman, Vice Chair of the Federal Reserve, said at an event in Washington, D.C. on the same day, "While inflation is within the 2% target range, the labor market is weaker than expected," predicting, "There could be up to three rate cuts by the end of the year." As employment cools, growth remains solid, and inflation stays high, uncertainty about the pace and extent of future rate cuts is increasing.

After the announcement of robust growth, U.S. Treasury yields rose, especially for short-term bonds. The yield on the 10-year Treasury, the global benchmark for bond yields, increased by 2 basis points (1bp = 0.01 percentage point) from the previous trading day to 4.17%, while the yield on the 2-year Treasury, which is sensitive to monetary policy, climbed by 5 basis points to 3.65%.

However, some experts believe that the strong second-quarter GDP will not significantly alter the Federal Reserve's policy trajectory. Paul Stanley, Chief Investment Officer (CIO) at Granite Bay Wealth Management, analyzed, "The strong GDP data today is unlikely to change the Fed's path for rate cuts," explaining, "because this data is looking at the past."

The market's focus is now on the August Personal Consumption Expenditures (PCE) Price Index, which will be released on September 26. The core PCE price index, the inflation indicator most closely watched by the Fed, is expected to have risen by 0.2% month-on-month last month, slowing from July's 0.3% increase.