Powell "singles out" overvaluation in U.S. stocks! Peng Fu analyzes the core contradictions of the current U.S. stock market [Peng Fu Talks 6]

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From Powell “Naming” U.S. Stock High Valuations! Fu Peng Analyzes the Core Contradictions of the Current U.S. Stock Market

>>This article only reflects the author’s opinions. Click on the video above to watch! This episode was recorded on September 24, 2025.

Viewing the world from the trading desk, Fu Peng comments on finance.

Overnight, Federal Reserve Chair Powell made rare remarks on U.S. stocks, clearly stating that current U.S. stock valuations are at a relatively high level. After these statements were released, the U.S. stock market responded accordingly. Given these market dynamics, it is necessary to analyze the overall situation of U.S. stocks in depth, by using corresponding data and charts.

First, the chart on the left covers important assets in the current U.S. stock market, specifically using the key metric of Shiller’s CAPE Ratio (Cyclically Adjusted Price-to-Earnings Ratio). Readers familiar with my analysis know I generally prioritize this indicator when assessing asset valuations. According to the data, in 2021 the CAPE Ratio for U.S. stocks was roughly between 38 and 40; currently, it is still around 38; and during the phase influenced by tariffs at the start of this year, it also reached about 38. Analyzing from this single metric, U.S. stocks are far from “cheap” now, and Powell’s assessment of “high U.S. stock valuations” is well supported by data. This is an undisputed conclusion.

Next, the right chart summarizes the major contributors and their proportions to index performance in U.S. stocks from 2024 to 2025. Taking the S&P index as an example, its overall performance is mainly driven by two factors: numerator (corporate profits) and denominator (valuation level). Analysis of their relative contributions shows the numerator (corporate profits) is clearly dominating over the denominator (valuation). This means that the rally in U.S. stocks from 2024 to 2025 was primarily powered by profit growth; although some push also came from valuation expansion, this conclusion is distinct from an explicit judgment on valuation highs or lows.

A lingering market question may be: If corporate profits are contributing more, why are valuations still rising so rapidly? In fact, this reflects expansion in both the numerator (profits) and denominator (valuation), and the analysis core is which dominates market cap growth. To understand this, revisit the U.S. stock market from 2021 to 2022. Take Nvidia and AI-related indices, for example; in early 2021 to 2022, their climbs were driven almost solely by denominator (valuation) expansions—at the time, Nvidia’s value wasn’t validated by its profits, and price gains were mostly due to the post-pandemic overall re-rating cycle. Because most assets, including the tech sector, were driven primarily by denominator factors, I judged in mid-2021 to 2022 that a “valuation kill” market was coming in U.S. stocks. Later, when the Fed began a rate hike cycle, rising rates directly hit the denominator, and the “valuation kill” market played out as expected.

The most typical case during this period was “Cathy Wood’s” ARK fund: during the valuation expansion cycle, the fund’s value soared; during the “valuation kill,” it fell sharply. Over the same period, Bitcoin dropped from $80,000 to $20,000, for the same logical reason—asset pricing was all about the denominator, and once rates rose, asset prices were severely impacted.

However, 2023 marked a significant turning point for the U.S. market. Since then, Cathy Wood’s fund hasn’t been able to bounce back to previous highs, while leading tech assets like Nvidia, “FAANG” (Facebook, Apple, Amazon, Netflix, Google), and “MAG 7” (Apple, Microsoft, Google, Amazon, Nvidia, Tesla, Meta) have resurged. The logic behind this divergence is the market’s main driver shifted from the denominator (valuation) to the numerator (profit). Notably, in profit-driven markets, after leaders rise to a certain point, capital tends to flow into non-leading assets, creating a “circle expanding” effect, and Cathy Wood’s funds, which hold mostly non-leader growth stocks, benefit temporarily during this process. Therefore, at every U.S. market top, her funds’ value peaks in sync with the market but at increasingly smaller increments—a further sign that the numerator is significantly more important in the current market, echoing the data conclusions above.

Back to the current core question: Does Powell’s “U.S. stock valuations are high” mean there must be a downturn? Based on my previous “numerator (profit) – denominator (valuation) – G term (corporate governance reforms and other factors)” analysis framework, the current market’s key contradiction lies in the power balance between numerator and denominator. At present, the numerator (corporate profits) is stronger than the denominator (valuation), which means the kind of “pure valuation kill” market triggered directly by rates in 2021–2022 is now very unlikely to recur.

It’s worth adding that since 2021–2022, U.S. 10-year Treasury yield has shown a “converging triangle” pattern: the lower bound is about 3.8%, and the upper about 4.6%, staying within that volatile range. This trajectory is an important reference for U.S. stocks: If the 10-year yield breaks above 4.6%, it will suppress U.S. stock valuations via the denominator; but that breakout would also reflect a resilient U.S. economy with inflation and fundamentals able to support higher rates—so, numerator (profits) growth can offset denominator pressure. U.S. stocks might see higher volatility, but the overall trend is unlikely to fundamentally reverse.

On the other hand, if the 10-year yield drops below 3.8%, it could signal a weakening job market and economic recession. In this case, macroeconomic pressure will first hit the numerator (corporate profit expectations), leading to a “profit expectations downturn → falling stock prices → valuation shrinkage” spiral. While this “valuation kill” is not triggered directly by rates but by deteriorating profit outlooks, the impact on asset prices is still notable. The tariff incident at the start of 2024 is a typical example: unexpected tariff policy quickly damaged market profit expectations, leading to sharp drops, matching the current market’s “profit-driven” nature.

In my view, the current core focus in analyzing U.S. stocks should be whether the 10-year Treasury yield breaks through the upper or lower bounds of this “converging triangle”: If it fluctuates between 3.8% and 4.6%, high valuations can still be supported by profit growth; if the economy does fall into recession, U.S. stocks may face a large pullback, and denominator-driven assets, such as Cathy Wood’s funds, will likely fall more than profit-driven leading assets. It’s important to note that the 2022 market has already filtered between “profit-driven” and “valuation-driven” assets, and their performance gap is difficult to close in the short term.

Today’s Fu Peng Talks episode isn’t about forecasting a rally or a crash, but about using this analysis of Powell’s “U.S. stock valuations are high” statement to give investors a core focus for future observation—closely watch U.S. 10-year Treasury yields, profit data, and macroeconomic signals, to better understand U.S. stock market developments. Thank you.

Thanks for listening, I hope it was helpful—see you next time.

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Risk Disclosure and DisclaimerThe market involves risks, and investment needs caution. This article does not constitute personal investment advice and does not take into account specific investment objectives, financial status, or needs of any individual. Users should consider whether any opinions, views, or conclusions in this article fit their own circumstances. Investing based on this article is at your own risk. ```