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Dow Jones NewsSep 24, 2:35 PM UTC
DJ Powell Sees Stocks As Expensive. That's Not His Problem. -- Barrons.com
By Martin Baccardax
Federal Reserve Chairman Jerome Powell has a problem -- but he doesn't have the same problem that investors do. While that likely means he's in no rush to support them, he isn't going to stand in their way, either.
Powell's hands are full with the task of navigating the world's biggest economy -- which is a thicket of risks tied to tariffs, inflation, a weakening labor market, and unprecedented political pressure.
The Fed chair called it a "challenging situation" during a speech in Providence, R.I., on Tuesday.
"Near-term risks to inflation are tilted to the upside and risks to employment to the downside," he said, adding that those "two-sided risks mean there is no risk-free path" for rate policy.
What he didn't appear to be concerned about was what's happening in financial markets, where stocks are trading near their highest levels on record, but carrying the most expensive valuations since the dot-com era.
"We don't have a view that we know what the right price of any particular financial asset is," Powell said. "But by many measures, equity prices are fairly highly valued."
He conceded that equity prices, along with other measures of financial conditions -- such as the premium companies must pay to borrow money and the broader level of interest rates -- can affect consumer spending.
But he didn't appear overly concerned that this is fueling the kind of "irrational exuberance" that former Fed Chairman Alan Greenspan famously warned of during the roaring tech rally of the mid-1990s.
"It isn't a time of elevated financial stability risks," Powell said flatly.
Powell has long emphasized the Fed's dual mandate, which seeks full employment with stable prices. However, at present, a move to lower interest rates and support the labor market could also stoke inflation pressures. Powell has insisted that the Fed is not on a "pre-set course" in terms of policy and that the central bank will need to monitor incoming data carefully.
Ed Yardeni, president and chief investment strategist of Yardeni Research, thinks Powell's assessment of financial risks, at the very least, is largely correct. He argued in a Wednesday note that the kind of "Black Swan" events that upend markets tend to occur "unexpectedly, especially when irrational exuberance is widespread and intensifying."
And there are some worrying signs.
The extraordinary influence that the biggest tech stocks -- like Nvidia, Microsoft, and Meta Plaforms have in terms of the overall S&P 500's market value and its broader earnings growth -- is at its highest level on record and well ahead of the level seen during the dot-com era.
Bank of America analysts, led by Savita Subramanian, also noted in a research note that the benchmark has never been more expensive in terms of its current market value compared to the overall economy.
Beyond that, initial public offerings are soaring, digital assets are powering higher, and market volatility gauges are pinned near the lowest levels in five years. Perhaps more concerning for the Fed, however, is the fact that elevated stock prices can stoke consumer price pressures.
Doug Ramsey, chief investment officer at Leuthold Group, thinks the S&P 500 should be a part of the "inflation-forecasting tool kit" -- in both directions.
"To the extent that inflation has been propped up by soaring asset prices, it could also become self-correcting," he said in a note published Wednesday. "While rising stock prices only occasionally prove to be inflationary, falling stock prices have almost invariably been disinflationary."
The Fed likely doesn't want markets dictating the pace of inflation, but it's not likely to set policy based on how stocks are performing against the broader economy. That's probably good news for investors looking for an extension of this year's extraordinary rally, which has the S&P 500 up nearly 34% from its April lows.
The CME Group's FedWatch is pricing in two more quarter point rate cuts between now and the end of the year, and pegs the fed-funds rate between 3% and 3.25% in September 2026.
Collective S&P 500 profits are likely to rise by 10.6% this year, and 13.8% the next, according to LSEG forecasts. Goldman Sachs sees artificial intelligence boosting potential U.S. growth to around 2.1% over the next five years.
That's a bullish equation for stocks -- and while Powell might have some concerns over how they're currently priced, he pretty much told markets on Tuesday that it's not his problem.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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September 24, 2025 10:35 ET (14:35 GMT)
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