What does the warning of risks from Federal Reserve Chairman Powell, from Greenspan's "irrational exuberance" to Powell's "high valuations in the U.S. stock market," mean for the market?

The warnings from the Federal Reserve Chairman regarding stock market valuations have always attracted significant market attention. However, according to the latest research from JP Morgan, such warnings often have limited actual impact on the market.

Powell stated this week that although stock prices are "valued quite high," this is not a time of increased financial stability risks. He emphasized that the path to further policy normalization is not without risks. This statement continues the tradition of the Federal Reserve Chairman issuing warnings about asset price valuations.

According to the Wind Trading Desk, JP Morgan's analysis shows that from Greenspan's "irrational exuberance" in 1996 to Powell's statement this week about stock prices being "valued quite high," the valuation concerns from the Federal Reserve Chairman have not triggered significant market adjustments.

According to JP Morgan, after each valuation warning from the Federal Reserve Chairman since 1996, the S&P 500 index did not experience negative returns in the following 1 month, 6 months, and 12 months. On average, the positive returns in the 12 months following the warning were only slightly lower than the performance in the 6 months prior to the warning, indicating a slowdown in market growth but still maintaining an upward trend.

Historical Valuation Warnings from Federal Reserve Chairmen

JP Morgan has compiled the valuation warnings from Federal Reserve Chairmen since Greenspan's warning in December 1996 about "irrational exuberance improperly inflating asset values." These warnings have occurred in various macroeconomic environments, but most took place during periods of loose monetary policy.

Bernanke warned against excessive risk-taking in May 2013, while Yellen expressed concerns about high valuations in specific industries and the overall market in July 2014 and May 2015, respectively. During the pandemic, Powell discussed valuation issues in relative terms and attributed the bubble in asset prices in April 2021 to the effects of vaccination and economic reopening.

According to JP Morgan's statistics, the average market increase in the 6 months prior to these warnings was about 14%, ranging from 2% in May 2015 to over 24% in May 2021.

Market Response Patterns: Limited Warning Effects

JP Morgan's research reveals three key observations.

First, the valuation warnings from the Federal Reserve Chairman did not trigger negative stock returns in the following 1 month, 6 months, and 12 months. The immediate impact was quite mild, with the S&P 500 index showing slight positive returns within 1 month, while international markets performed flat to slightly negative.

Second, the average positive returns in the 12 months following the warning were slightly weaker than the performance in the 6 months prior to the warning, indicating a slowdown in market growth but still maintaining resilience.

Excluding the internet bubble and pandemic periods, the U.S. stock market typically outperformed international markets after the warnings. However, there were exceptions, such as in 2013 and 2014, when the German stock market outperformed U.S. stocks due to low interest rates and expectations of quantitative easing.

Third, broad valuation assessments are often based on historical data, obscuring the impacts of changes in industry composition and structural breakthroughs like artificial intelligence. The forward price-to-earnings ratio 12 months out remained relatively stable after the warnings, indicating that stock market performance was primarily driven by earnings improvements rather than valuation expansion

Compared to High Valuations and Concentration, Macroeconomic Weakness is More Likely to be a Catalyst for Market Adjustment

Although high valuations and extreme market concentration have drawn comparisons to the dot-com bubble of the late 1990s, there are significant differences between the two.

JPMorgan Chase emphasizes that the current valuations of growth stocks are built on solid fundamentals. Unlike the dot-com bubble period, which relied on "hockey stick" profit forecasts and market euphoria, today's leading growth companies are achieving strong double-digit organic growth, with approximately 25% stable profit margins, and are returning capital to shareholders through stock buybacks and other means.

The report argues that the characteristics of "quality" and "growth" are key pillars supporting current valuations. Therefore, while high valuations and crowded trades may suggest vulnerabilities in the market, valuations alone are unlikely to serve as a direct catalyst for a market correction.

JPMorgan Chase believes that for investors, rather than fixating on valuation levels, it is more prudent to focus on macroeconomic fundamentals. High valuations are not the trigger point, but they can reduce the market's resilience when facing shocks. A significant market correction is more likely to be triggered by macroeconomic weakness, such as a deterioration in the labor market.

Additionally, the analysis points out that traditional valuation assessments are often based on historical data, which may obscure changes in economic structure, such as shifts in industry composition and the impacts of structural breakthroughs like artificial intelligence (AI). These new factors could reshape the market's valuation logic.

Looking ahead to 2026, JPMorgan Chase expects the market to rebound. Supporting factors include the expansion of the AI investment cycle, robust capital expenditure activities, accommodative monetary policy, and solid balance sheets for households and businesses