Small Correction 'Not Unhealthy' Says JP Morgan's Grace Peters

The S&P 500 was set to slide for a fourth straight session on concerns around the Federal Reserve's policy outlook, artificial intelligence valuations and a selloff in Bitcoin. US stocks have come under pressure this month as investors worried the AI-led rally has run too hot. The S&P 500 is trading at about 22 times forward earnings, above its 10-year average of 19. Concerns are also rising about the economic impact of the longest US government shutdown. Grace Peters, Co-Head of Global Investment Strategy for JP Morgan Private Bank Joined Caroline Hepker and Stephen Carroll to share her thoughts on the market outlook.

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US stocks sank, putting the S&P 500 Index on track for its longest slide since August, as a six-month rally teetered following a $1.2 trillion selloff in cryptocurrencies and amid fears around stretched artificial-intelligence valuations.

The benchmark equities gauge dropped for a fourth day, declining 1% as of 11:19 a.m. on Tuesday in New York, as investors reconsidered their optimistic expectations for Federal Reserve interest-rate cuts. The technology-heavy Nasdaq 100 Index tumbled 1.3% — leaving it down 6.3% from its October peak. A basket of the Magnificent Seven companies declined 1.8%. Nvidia Corp., at the center of the AI frenzy, slumped an additional 2.3% ahead of its earnings report after Wednesday’s close. Amazon.com Inc. and Microsoft Corp. fell more than 3% after a ratings downgrade.

Volatility has come roaring back. Wall Street’s so-called fear gauge, the Cboe Volatility Index, topped 25 — above the key 20 level that causes concern for traders — and reached its highest in a month.

While the selling was broad and equity indexes fell globally, investors culled risky stocks from their portfolios, punishing shares of fast-growing companies that have led the market higher during the past two years. A Goldman Sachs Group Inc. basket of unprofitable tech companies, which includes firms such as Roku Inc. and Peloton Interactive Inc., dropped almost 2%. The consumer staples, real estate and utilities sectors — areas where companies tend to have comparatively low valuations and offer robust dividends — fared better.

Topping the list of worries are AI valuations and whether the Fed will cut rates next month. Traders have diminished conviction about another reduction in borrowing costs, with swaps now implying a less-than-50% likelihood of a December rate cut. Several policymakers have recently cautioned against a cut, citing the risk of inflation, although Fed Governor Christopher Waller repeated his view in favor of lowering rates.

“Fears are growing that the AI trade can’t keep up with the momentum,” said Eric Beiley, executive managing director of wealth management at Steward Partners, who has nearly 10% of his portfolio in cash and is buying international and defensive stocks. “Nvidia will need to reassure investors that these lofty valuations are warranted, otherwise the stock market could be in for further declines.”

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