Capital Idea: Morning wrap, 26th August

• Wall Street drops amid lack of follow through following Jackson Hole relief rally

• Questions re-emerge about valuations as technicals signal possible pull back

Wall Street pulled back as it blew off some froth following Friday’s post-Powell rally. Volumes were low and thin summer trading conditions have returned as the next impetus for the markets are sought. There are a few events that stand out on the calendar that could stoke volatility. In fact, could prove the catalyst to a bigger market reversal. Nvidia’s Q2 results arrive mid-week and transcend just the company. Not only does the $4 Trillion company hold significant sway because of its heavy weight in the S&P 500 and NASDAQ, but it also tells a clear macro, artificial intelligence and geopolitical story. Friday’s PCE data will also be one of two critical hurdles between the markets and a September Fed cut. Consensus forecasts point to an uplift in key Core PCE Index to 2.9% as tariffs filter through the US economy. If that figure comes out with a 3 in front of it, it could shake up expectations for the path forward for US rates and cause fresh volatility.

Given the lack of follow through from Friday night’s rally, questions are re-emerging about valuations and the risk skew for stocks. The forward price-to-earnings multiple for the S&P 500 is almost back to multi-year highs. From a technical perspective, a new high has yet to be registered for the S&P 500 or NASDAQ – although the Dow has managed to hit a record by virtue of the rotation into cyclical stocks. Nevertheless, there are signs of exhaustion in the market and a possible head-and-shoulders pattern being carved out on the NASDAQ. While multiples and technicals can only ever tell you about the market’s sensitivity to shocks and key levels, both can be said to point to a market vulnerable to negative news. In another potential signal of a simmering bearishness, Bitcoin extended its pull back overnight: a move which is sometimes an omen of diminishing risk appetite.

(Source: Trading View)

(Past performance is not a reliable indicator of future results)