To The Moon

Here is a structured view of the situation, along with my views and a tentative tactical posture. (These are not investment recommendations, but rather a reasoned framework.)

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1. Is this a “healthy” pullback?

In my view, yes — and in fact I would prefer to see occasional corrective pressures in such a stretched market. Here’s why I lean that way:

Supporting arguments for a healthy pullback

Overbought conditions: The U.S. equity market has run strongly through September (helped by the Fed’s rate cut). At some point, profit-taking and trimming become natural.

Valuation introspection: With many valuation metrics at (or near) extremes, a modest pullback helps “reset” investor expectations.

Technical/composure: A shallow, controlled decline (say 3%–5%) is often healthier than letting sentiment get overheated and then risk a sharper drop.

Macro uncertainty: Strong economic data, combined with ambiguous Fed messaging, introduces ambiguity. A pullback provides breathing room for markets to digest and reassess.

That said, whether it remains “healthy” depends on how much downside we allow. If selling pressure accelerates broadly beyond defensives, or contagion into cyclical sectors begins, that could morph into something more concerning.

So, I think this is — for now — a moderate corrective pause, not the start of a crash. But it’s a fragile regime: vigilance is warranted.

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2. Do I agree with Powell that U.S. equities are overvalued?

I find his comment broadly reasonable and defensible. He said valuations appear “fairly highly valued” (i.e. not necessarily screaming bubble, but in a realm of caution). 

Here’s how I view it:

Valuation metrics support caution: By many measures (forward P/E of S&P 500, price-to-book, market cap to GDP, Shiller CAPE) equities, especially large-cap tech, are not cheap by historical norms. 

Quality weighting and secular growth may justify some premium: The composition of today’s market is different from prior eras. We have more durable revenue streams, stronger balance sheets (on aggregate), and secular growth drivers (AI, cloud, software) that arguably warrant a richer multiple.

Valuation is only half the story: Even if valuations are elevated, the growth side (revenue, margins, earnings) must deliver. Overvaluation becomes dangerous when forward expectations get derailed or downgraded.

Powell is signaling prudence, not panic: His language is cautionary, not alarmist; I think he’s giving the market a gentle nudge to reflect on risk rather than declaring a collapse is imminent.

So, I don’t think Powell is being overly dramatic — I think his posture is sensible, given the uncertainties ahead. I’d lean that U.S. equities are on the expensive side of fair, and the balance is tilted toward downside risk rather than obvious upside surprise.

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3. Can the upcoming earnings season justify the current lofty valuations?

It could, but it's a high bar. Whether earnings season validates current multiples depends heavily on:

Earnings growth vs. expectations: To justify a forward P/E in the low-20s, companies at scale must deliver substantial bottom-line growth, including margin expansion, expense control, and ideally some tailwinds (e.g. cost reductions, favorable FX, productivity gains).

Guidance / forward outlook: Even if near-term results beat, if management becomes cautious on guidance due to macro or demand slowdowns, that will weaken valuation support.

Sector dispersion / leadership rotation: The big tech names have been carrying much of the multiple compression and asymmetry of returns. If smaller or mid-cap sectors show strength, that diversifies market support.

Macro crosswinds: Input costs, wage pressure, interest rates, FX, and consumer demand are all potential drags. Even a good earnings season can't fully insulate if macro surprises shift against equities.

In other words, I’m cautiously optimistic that we could see enough upside surprises and guidance to sustain valuations short term, but it's risky to assume that all or most names will "save" the multiples.

If I were forced to make a directional bet: I expect a mixed earnings season, with mega-cap tech still having the greatest upside (but also the greatest downside risk if something disappoints), and more modest support from broad-cap names.

So yes — earnings can justify valuations in aggregate, but it's not a sure thing, and the tolerance for missteps is low.

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4. Tactical posture: profit-taking vs full hedging?

Given the current environment, I would advocate a tilted, partial risk management posture, not an all-in hedging move. Here’s how I would proceed:

Suggested approach

1. Take partial profits / trim exposure

In core positions that have delivered outsized gains (especially in richly valued names), lock in some gains.

Reduce overall net exposure modestly, but avoid wholesale liquidation if conviction remains.

2. Hedge selectively, not full hedging

Use options (e.g. put spreads) in high-risk positions rather than blanket portfolio hedges.

Consider short-term hedges around key macro releases (inflation, Fed minutes, etc.).

Use more liquid, lower-cost hedges (e.g. partial equity index hedges) rather than costly full downside insurance.

3. Increase cash / dry powder

Hold more cash than usual (or deploy into highly liquid assets) to give flexibility in case of deeper corrections or market dislocations.

Use that flexibility to re-enter or opportunistically add on weakness.

4. Tilt toward defensives / quality / optionality

Favor more resilient sectors (e.g. staples, health, utilities) if macro surprises turn negative.

Favor names with stronger balance sheets, recurring revenue, and ability to withstand volatility.

Maintain optionality via exposure to thematic / growth areas (e.g. AI, cloud) but with conservative sizing.

5. Reassess dynamically

Monitor upcoming earnings reports, macro data, and central bank commentary.

If earnings broadly disappoint or macro surprises tilt negative, accelerate hedging / defensiveness.

If the market digests data well and upward surprises dominate, trim hedges and re-deploy toward more aggressive posture.

Why not full hedging?

Costly: Full hedging eats away at upside in a rally — and if the market resumes the uptrend, you’ll be underexposed.

Signal risk: Fully hedging suggests you’ve “given up” on the upside, which may not align with your longer-term conviction or strategy.

Flexibility loss: Full hedges can lock you out of rebounds or recovery moves.

Better alternatives: Partial trims + tactical hedges + cash reserve give a more adaptable and nuanced risk-management approach.

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Summary — how I see it, and what I'd do

I view the recent three-day decline as a healthy corrective pause, not necessarily the start of a collapse.

Powell’s caution on valuations, in my estimation, is credible and prudent. U.S. equities do appear elevated by many standards.

Earnings season has the potential to justify the valuations — but the execution risk is significant, and not every company will rise to that level.

My tactical posture would be to take partial profits, hedge selectively, hold more cash, and tilt toward more resilient names — but not to shut off upside by fully hedging the portfolio unless the regime shifts dramatically.