A return to records, but calls for a correction grow 

The S&P 500 after touching intra day high of $6,920 on 10/29 dropped 1.2% today following a slew of Wall Street CEOs citing valuation concerns and an AI bubble. The Nasdaq Composite did one worse, with a drop of 2% and is down to 23,349, a full 3% from its high of 24,120.

I believe that the S&P 500 will likely correct another 3-5% from here and highly stretched semis, and AI stocks even more. There will be good re-entry points but not now.

Bloomberg, CNBC, and Barron's all had headlines looking for a correction on high valuations

Bloomberg - Wall Street CEOs warn of an impending correction

Morgan Stanley CEO, Ted Pick said markets have come a long way, but there’s still “policy error risk” in the US and geopolitical uncertainty.

“Yes markets seem expensive...but the reality is that systematic risk has probably narrowed,” he said. There will be more focus on company earnings in 2026 and there will be greater dispersion, where stronger firms will outperform while weaker ones will lag, he said. In addition, the new issue market is active around the world “and investors want to take risks.”

“We should also welcome the possibility that there would be 10 to 15% drawdowns that are not driven by some sort of macro-cliff effect,” Pick said, calling that “a healthy development.”

Goldman Sachs Group Inc.’s David Solomon, who also see the possibility of a significant selloff in the coming period and said pullbacks are a normal feature of market cycles.

Corporate earnings are strong but “what’s challenging are valuations,” said Mike Gitlin, who helps oversee about $3 trillion as president and chief executive officer of investment manager Capital Group, during a financial summit organized by the Hong Kong Monetary Authority on Tuesday.

On whether stocks are cheap, fair or fully valued, Gitlin said most people “would say we’re somewhere between fair and full, but I don’t think a lot of people would say we’re between cheap and fair,” he said. The same goes for credit spreads, Gitlin added.

The Wall Street Journal ran an article pointing towards excessive valuation

WSJ's columnist, Spencer Jakab used a popular benchmark called the Shiller P/E ratio, created and popularized by Nobel Prize-winning economist Robert Shiller which looks back at 10 years of earnings and adjusts them for inflation to cover an entire business cycle. This is what he wrote:

It recently broke above 40 for the second time ever.

It is sending a clear signal: Expect paltry stock returns in coming years.

The first was in 1999, and it didn’t stay there long. Cyclical peaks in the Shiller P/E have coincided with negative real (inflation-adjusted) returns for stocks over the ensuing 10 years, including in 1929, 1966 and 2000.

The soundest argument for dismissing today’s nosebleed Shiller P/E is that 40 isn’t as high as it sounds. The long-run average has been around 17.

[caption id="attachment_6105" align="alignnone" width="565"]

The_Shiller_P/E_Ratio
Source: Wall Street Journal[/caption]

This ratio at over 40, is a warning sign that stocks are overpriced, compared to their historic norms

Contributing to today's mayhem, which saw Palantir's price lopped off by about 9% to $188, was who else but Scion Capital's, Dr.Michael Burry, of the Big Short fame, the one bear that made a killing during the great financial crisis by shorting the housing market. True to form, Dr. Burry is seemingly in the driver's seat with a roughy $1Bn short bet in options on Palantir and Nvidia, with a bigger emphasis on Palantir (PLTR). Palantir is valued at 215x 2026 earnings and 82x sales even after the big drop, so I can see where Michael Burry is coming from.

Of course, Palantir CEO, Alex Karp thinks Burry is "Batshit Crazy", and you can see his interview on CNBC here.

I also don't believe that the Fed will come to the rescue,  (the Nasdaq Comp fell over 2%,) and is trending for another 1-2% down day tomorrow.

Last week the FOMC meeting had a hawkish tint with Chair Powell clearly not inclined to brush inflation under the carpet and his remarks were quite clear

"  RATE CUT IN DECEMBER IS ‘FAR FROM’ FOREGONE CONCLUSION."

The Federal Open Market Committee cut 0.25% or 25 basis points at their October meeting, as expected, as insurance against a weakening job market even with inflation running at almost 3%.

However, this was dissented on both sides, with Steve Miran asking for a larger 50 basis point cut and Governor Schmid, dissenting in favor of no cuts, citing still high inflation.

The market breadth is seriously poor with one measure calling it the worst since 1990.

I believe that the correction will continue, and valuations should come down to more reasonable levels for the rally to continue.