An analyst saw "irrational optimism" in Powell's words. What will happen to the S&P 500?

Fed Chairman Jerome Powell's statements about an overheated stock market are reminiscent of former Fed chief Alan Greenspan's legendary warning about "irrational optimism" during the dot-com bubble of the early 2000s, Yardeni Research said. The company's analyst agreed with Powell that stocks are expensive, but didn't share his calm about the risks to financial stability. Crises tend to happen unexpectedly when investors are gripped by excessive optimism, Yardeni warned.

Jerome Powell's words about overpriced stocks are reminiscent of former Fed chief Alan Greenspan's winged statement about "rational optimism," according to Ed Yardeni, head of independent investment and research company Yardeni Research. His opinion quotes CNBC.

"How do we know that irrational optimism has over-exaggerated asset values, making them vulnerable to sudden and prolonged declines?" said Greenspan in December 1996, warning that the tech sector rally that had begun in the stock market could sooner or later turn into a sharp and long decline. Powell, on the other hand, reported on September 23, 2025, that "by many measures, [U.S.] stocks appear to be overvalued." At the same time, he emphasized that this does not mean "increased risks to financial stability".

Yardeni said he agreed with Powell on stock valuations and reminded: the ratio of current S&P 500 market capitalization to projected earnings for next year is at a record high, and the price to projected earnings ratio is 22.8 - only slightly below the 25 at the peak of the 1999 dot-com bubble. But it was the Fed chief's statement about low risks to financial stability that alerted the economist. He emphasized that such words of Powell cause rather the opposite reaction: financial crises often happen unexpectedly - as "black swans", especially in periods when the markets grow and irrational optimism increases.

"The good news so far is that weekly projected earnings per share for the S&P 500 has accelerated in recent weeks. This suggests that third-quarter earnings will renew another record," Yardeni added. However, he warned that signs of short-term stock market problems are already showing.

In trading on September 24, the value of the U.S. benchmark slightly declined - by about 0.4%. Since the beginning of the year, the S&P 500 has added 12.9%, and compared to the April collapse after the introduction of Trump's duties, it has grown by a third.

The growth of the index to a record is largely supported by investors' optimism about the AI boom and market participants' expectations of further easing of the Fed's policy, Barron's said. Following the results of the last meeting on September 17, the regulator for the first time in 2025 went to reduce the key rate by 25 bps - to 4-4.25%. Traders now expect two more quarter-point cuts this year and disagree about a possible third move in January, according to CME's FedWatch monitoring tool.

At the same time, Powell warned in his speech on Tuesday that the market's expectations of aggressive rate cuts are not at all guaranteed. He acknowledged that the Fed finds itself in a "difficult situation": on the one hand, the threat of accelerating inflation persists, on the other hand, the risks of a weakening labor market are growing. "The two-sided risks mean there is no safe path," Powell said.

Additional pressure was brought by the cooling rally in the technology sector, spurred by AI: it was the symbol of market overheating, Barron's emphasized. If the momentum of bigtechs runs out, and expectations on rates do not come true, the growth of quotations risks not only to stop, but also to turn sharply, the edition concluded.

This article was AI-translated and verified by a human editor