Powell Pulls Markets Back, Housing Data Takes Center Stage

Good Morning Investors,

The S&P 500 pulled back 0.6% to 6,657 following Chair Powell's commentary on elevated asset valuations, ending a three-day winning streak as expected consolidation finally arrived. The market's reaction to Powell's "fairly highly valued" comment represents healthy profit-taking rather than fundamental deterioration.

Futures point to modest recovery following Tuesday's consolidation, with pre-market activity reflecting orderly profit-taking rather than panic selling. The S&P's ($SPY ( ▲ 0.07% )) retreat from record levels creates the digestion period I anticipated, with early market activity suggesting institutional interest at lower levels. The Nasdaq ($QQQ ( ▲ 0.21% )) is bouncing back this morning up 0.3% pre market and small caps ($IWM ( ▲ 1.32% )) are trying to bounce after retreating from record highs yesterday to ultimately finish negative.

Today's economic calendar features critical housing data including new home sales, building permits, and mortgage applications. This data will provide insights into interest rate sensitivity across consumer sectors as the Fed continues its easing cycle.

Chair Powell's Tuesday remarks acknowledging "fairly highly valued" equity markets triggered immediate selling without fundamentally altering the Fed's dovish bias. His balanced assessment of two-sided risks, inflation concerns versus employment weakness, maintains the central bank's accommodative stance despite elevated asset prices.

The market's swift reaction demonstrates efficient price discovery mechanisms. Investors are reassessing risk premiums after the recent rally, creating the consolidation phase that provides better entry points for patient capital.

Micron ($MU ( ▼ 0.56% )) Technology delivered impressive Q4 results that underscore the AI infrastructure buildout's sustainability. Revenue surged 46% year-over-year to $11.32 billion, with Q1 guidance of $12.5 billion beating consensus by $700 million.

The company's high-bandwidth memory (HBM) revenue reached nearly $2 billion quarterly, implying an $8 billion annualized run rate. This demonstrates robust demand for AI infrastructure components beyond the headline GPU makers. As the only U.S.-based memory manufacturer, Micron benefits from geopolitical positioning advantages.

The results support the view that AI spending represents structural transformation rather than speculative excess, justifying premium valuations across the technology ecosystem.

Last week's unified rate decision is giving way to emerging policy divergence. Governor Miran advocates for 200 basis points of additional cuts while Governor Bowman warns of labor market deterioration risks. This debate reflects the complex environment facing policymakers managing the dual mandate.

Market pricing shows reduced expectations for aggressive easing, with traders scaling back bets on 50 basis point cuts. The CME's FedWatch tool maintains 94% probability for October cuts, but options markets suggest less aggressive moves ahead.

Policy uncertainty creates near-term volatility while maintaining the fundamental case for continued accommodation as real rates remain historically restrictive.

Lithium Americas ($LAC ( ▲ 1.98% )) surged 75% on reports of potential Trump administration equity stakes, highlighting how policy positioning drives sector rotation. The administration's interest in domestic lithium production creates opportunities across the battery metals complex.

Real estate technology continues explosive moves, with Better Home up 162% over five days. This reflects investor positioning ahead of the Fed's easing cycle, though historical parallels suggest caution regarding sustainability of such moves.

Corporate earnings momentum continues broadening beyond mega-cap technology. Micron joins companies demonstrating operational excellence through challenging conditions, with AI-driven demand, pricing power maintenance, and margin expansion supporting quality names.

KB Home's upcoming results will provide insights into consumer resilience and mortgage rate sensitivity, important for assessing real estate sector positioning as rates decline.

Tuesday's consolidation occurred on normal volume patterns, suggesting profit-taking rather than institutional distribution. The S&P 500's ability to hold above key technical levels maintains uptrend integrity while creating better entry opportunities.

Corporate buyback programs provide ongoing technical support, with announced repurchases approaching $960 billion year-to-date. This structural bid continues supporting U.S. equity outperformance relative to global markets.

Thursday's jobless claims and Friday's PCE inflation data will provide crucial Fed policy insights. Housing data throughout the week offers real-time assessment of interest rate sensitivity across consumer sectors.

Government shutdown concerns add tactical uncertainty without undermining longer-term fundamentals. Short-term volatility from Washington dysfunction creates opportunities for positioned investors.

I maintain my 6,800 S&P 500 year-end target, with Tuesday's pullback creating the consolidation I anticipated. The combination of Fed accommodation, corporate earnings growth, and technical support remains intact despite near-term volatility.

Focus continues on companies demonstrating AI integration, domestic exposure benefits, and operational excellence. Quality factor outperformance should accelerate as market differentiation increases during uncertain periods.

Crypto markets remain range-bound as traditional risk assets consolidate. I maintain expectations for Q4 breakout driven by Fed easing and seasonal patterns. Current volatility provides entry opportunities for quality digital assets positioned for institutional adoption.

Tuesday's consolidation represents normal market function after consecutive record highs. Powell's valuation commentary creates healthy skepticism without undermining fundamental drivers supporting equity outperformance.

The emerging Fed policy divergence adds complexity but maintains the case for continued accommodation. Corporate operational excellence, demonstrated through results like Micron's, supports premium valuations in this environment.

This consolidation creates strategic positioning opportunities ahead of what remains a compelling Q4 setup.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor regarding your specific situation.