Markets Slip for Third Day as Valuation Jitters Weigh on Strong Data

U.S. equities fell for a third straight session on Thursday, marking the longest losing streak in a month, as valuation concerns overshadowed strong economic data. A revised GDP reading showed the U.S. economy grew at its fastest pace in nearly two years, but the upbeat tone failed to support risk appetite ahead of Friday’s key inflation report. Treasury yields rose, the dollar strengthened, and Bitcoin dropped sharply, reflecting broader risk-off sentiment.

Key Headlines & Market Movers

• Strong GDP, But It’s ‘Old News’: The U.S. economy expanded at a 3.8% annualized rate in Q2, up from the prior 3.3% estimate and marking the strongest growth since 2022. Weekly jobless claims fell to their lowest level since July, reinforcing the narrative of a resilient labor market. However, the backward-looking nature of the GDP report limited its market impact. Investors appeared more focused on what’s ahead, especially inflation and the Fed’s next steps.
• Valuation Pressures and Market Complacency: Despite solid fundamentals, stretched valuations remain a headwind. The S&P 500’s forward P/E has pushed above 22.9: levels only seen during the dot-com bubble and the pandemic-era rally. With optimism already priced in, some investors are starting to question whether equities can continue higher without a fresh catalyst, especially as October, a historically volatile month, looms.
• Fed Policy Divergence and Rate Cut Debate: Recent Fed commentary highlighted differing views on the pace of easing. While Fed Governor Miran pushed for more proactive cuts, others like Goolsbee and Schmid urged caution. Markets are pricing in roughly 40bps of additional cuts in 2025, but Friday’s PCE inflation data could recalibrate those expectations. A softer print may reinforce dovish sentiment, while a surprise uptick could dampen hopes for further easing this year.
• Crypto Sells Off; Big Movers in Equities: Bitcoin dropped 3.7%, dipping below $110,000 ahead of a $22 billion options expiry. The weakness rippled through crypto-linked equities like MARA and MSTR. Meanwhile, Intel rallied 9% on Apple stake speculation, and IBM gained 5% on optimism around quantum computing applications. On the downside, CarMax tumbled 20% after disappointing earnings, and Oracle’s slide continued for a third day, down 5.6%.

S&P 500 Sector Performance

Looking Ahead

All eyes are on Friday’s core PCE inflation report, which could either validate or challenge the current Fed trajectory. Investors are hoping for a soft reading to keep rate cut hopes alive, but expectations are already high. With earnings season approaching and a potential government shutdown adding uncertainty, markets may be entering a more cautious phase. Elevated valuations and seasonal volatility suggest a pullback wouldn’t be surprising, even if the broader economic backdrop remains solid.

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