Powell’s Warning on Overvalued Stocks: Why the Dow, S&P 500, and Nasdaq Fell

Powell’s Remarks and the Decline of the Three Major Indices: A Fracture in Rate-Cut Expectations and the Shutdown Risk

Part I. The Shaking of the Three Major Indices: The Overvaluation Debate and Investor Sentiment

On September 23, 2025 (local time), U.S. stocks closed lower across the board, with the Dow Jones Industrial Average, S&P 500, and Nasdaq all ending in negative territory. This came just a day after the market had been climbing to fresh record highs in an optimistic rally. The dramatic shift was triggered by a single remark from Jerome Powell, Chair of the Federal Reserve and arguably the most influential voice in global finance.

In his speech that day, Powell stated firmly: “U.S. stock markets are fairly highly valued.” That short sentence shook the entire market. Unlike the opinions of retail traders on social media, this was an official statement from the Fed Chair.

The market’s reaction was immediate and quantifiable: the S&P 500 fell about 0.8% in a single day, while the tech-heavy Nasdaq dropped 1.2%. The Dow also saw modest declines, resulting in a simultaneous drop across all three major indices. The hardest hit were the technology leaders that had driven the rally—NVIDIA, Apple, and Microsoft—all of which faced concentrated selling pressure.

NVIDIA: fell more than 3%

Apple: dropped about 2%

Microsoft: lost around 2%


To some, these might look like minor daily fluctuations. However, from an investor sentiment perspective, the signal was clear and powerful: “The Fed officially thinks stocks are too expensive.”

Tech Stocks Take the Direct Hit

In recent months, the market had been fueled by rate-cut expectations. When the Fed cuts rates, companies can borrow more cheaply, and growth stocks—particularly in the technology sector—benefit the most. This dynamic had attracted buyers even in the face of valuation concerns.

Powell’s words directly undermined those expectations. The “overvalued” label triggered a wave of profit-taking. Investors who had ridden the rally rushed to lock in gains, accelerating the correction in prices.

The Repeated Power of Warnings in History

This event calls to mind the historical power of central bank warnings. The most famous case is the dot-com bubble of 2000, when then-Fed Chair Alan Greenspan used the phrase “irrational exuberance.” The market did not collapse immediately after his remark, but within months the Nasdaq bubble burst, marking its peak and entering a painful, years-long correction. Even today, investors recall “Greenspan’s warning” as a harbinger of the crash.

Whether Powell’s remarks will play out on the same path remains uncertain. But historically, when the Fed Chair warns of a bubble, it serves as a powerful signal to cool overheated markets—one reason investors feel uneasy, recalling past parallels.

Shifting Investor Psychology

Investor psychology often moves markets more than raw numbers, and this case is no exception. The exact percentage drops—0.8% or 1.2%—are less important than the perception that “the Fed itself now believes stocks are too expensive.”

Short-term traders no longer hesitate to take profits.

Long-term investors start to wonder, “Is this really a safe entry point?”

Institutional investors feel pressure to rebalance portfolios for risk management.


This change in perception ultimately alters the course of the market. Powell’s remarks didn’t just cause a one-day decline—they may mark the starting point of a broader shift in sentiment and strategy over the coming months.


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Part II. The Fracture in Rate-Cut Expectations: The Fed’s Caution vs. Market Optimism

Another factor behind the decline is the discrepancy between the market and the Fed regarding the timing of rate cuts. At the start of the year, markets had assumed with confidence that the Fed would cut rates at least twice by late 2025 or early 2026. Optimism about easier policy helped propel stocks, especially growth names.

But Powell struck a more cautious tone. In his recent speech, he emphasized: “We are still a long way from price stability,” warning that aggressive cuts could create bigger problems.

Mixed Signals from Inflation and Employment

The data show a contradictory picture:

In August 2025, U.S. CPI rose 2.7% year-over-year, remaining above the Fed’s 2% target.

Meanwhile, unemployment rose slightly to 4.3%. While still low by historical standards, it signaled a gradual move away from full employment.


This means the Fed faces a dilemma: inflationary pressures persist, while the labor market shows early signs of weakening. Cutting rates too soon could reignite inflation—potentially a repeat of the 1970s stagflation. Holding rates too long, however, risks turning a slowdown into a full recession.

Thus, the Fed outlined three clear principles:

1. Never ignore the threat of inflation.


2. Prevent labor market softening from snowballing into a deep recession.


3. Adjust rate cuts gradually, not abruptly.



The Gap with Market Expectations

Markets, however, continue to crave a “low-rate rally.” Growth and tech stocks thrive on discounted future cash flows, making them disproportionately sensitive to lower rates. Investors piled into equities under the assumption that cuts were imminent.

Powell’s caution disrupted this narrative. If cuts are delayed, today’s lofty valuations lose justification. For example, the Nasdaq-100’s price-to-earnings ratio (PER) recently reached 31x, well above the long-term average of around 20x. Without timely cuts, such valuations become increasingly untenable, raising the risk of a correction.

Historical Precedents: Clash of Expectations and Reality

Early 1980s: Fed Chair Paul Volcker defied market hopes by holding rates high to crush inflation. Stocks wavered in the short term, but inflation was ultimately subdued.

2013 Taper Tantrum: Markets expected continued Fed easing, but a mere hint of tapering sparked a surge in Treasury yields and turmoil in emerging markets.


Each time the Fed’s signals clashed with investor expectations, markets swung violently and sentiment soured. Today’s situation carries the same risk.

Ripple Effects on Investor Behavior

Retail investors fear: “Are we already at the top?”

Institutions question: “Can we really sustain PERs above 30?”

Global funds reconsider positions, shifting toward safe assets like the dollar and Treasuries, which amplifies volatility.


In the end, the market reacts less to the actual data than to the perception that “the Fed has changed its stance.”


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Part III. The Shutdown Risk: Political Uncertainty Overhangs the Market

On top of Powell’s warning and delayed rate-cut hopes, another risk looms: a possible U.S. government shutdown. Together, these three challenges create a triple blow to investors.

Shutdown Deadline: September 30

The U.S. fiscal year begins on October 1, so Congress must pass a budget by midnight on September 30. But the Senate recently rejected a stopgap funding bill, leaving negotiations gridlocked.

If no deal is reached, the federal government shuts down—an event with real economic consequences:

About 2 million federal employees face furlough without pay.

National parks, museums, and federal services would close, disrupting daily life.

Goldman Sachs estimates GDP growth could drop 0.2–0.3 percentage points per quarter during a shutdown.


Thus, a shutdown is not just a bureaucratic delay but a serious economic shock.

Historical Lesson: The 2018 Nightmare

The last major shutdown illustrates the damage. In late 2018, disputes over funding for a Mexico border wall led to a 34-day partial shutdown, the longest in U.S. history.

Consequences included:

The S&P 500 fell about 9% in a single month.

The VIX volatility index spiked above 36, reflecting panic.

Government paralysis delayed corporate earnings releases and economic data.


The episode showed that shutdowns amplify investor anxiety and deliver direct shocks to markets.

Why This Time Feels Heavier

1. Already Fragile Sentiment: With Powell’s overvaluation warning and delayed rate cuts, confidence is already shaky. Shutdown fears only amplify the risk-off mood.


2. Deep Political Polarization: Disputes over healthcare, defense, and welfare spending widen the gap between parties, making compromise harder.


3. Twin Impact on Economy and Markets: A shutdown not only curbs spending but also raises volatility in financial markets.



Market Impact

If a shutdown happens, the most affected will be sectors reliant on government spending:

Defense contractors may face delayed Pentagon contracts.

Infrastructure and public service firms risk halted projects.

Consumer goods companies could suffer from reduced spending by furloughed workers.


Meanwhile, safe-haven assets tend to gain. Gold, the dollar, and U.S. Treasuries attract demand. In fact, gold futures rose about 2% in the past week, suggesting investors are already hedging against the risk.


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Part IV. Key Takeaways for Investors

1. Beware of Profit-Taking Phases
After a sharp rally, profit-taking is natural. But with tech valuations stretched, corrections could be steeper than expected.


2. Monitor Rate-Cut Timelines
With the Fed cautious, CPI, PCE, and jobs data will be decisive. Investors must prepare for heightened volatility around each release.


3. Factor in Political Risks
If the shutdown is short, markets may rebound. If prolonged, sentiment and the real economy could both deteriorate, turning corrections into structural declines.



Thus, investors should increase exposure to defensive assets such as cash, gold, and bonds, while closely tracking political negotiations and Fed communications.


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Conclusion

The decline in the three major indices is more than a one-day dip. It reflects the convergence of three powerful forces:

The Fed’s warning of overvalued markets

Its cautious stance on rate cuts

The looming government shutdown


Together, these form the first real test after the recent rally.

Markets always move in response to uncertainty. Yet history shows that even in volatility, opportunities emerge. For investors, the key is not to be distracted by short-term noise but to hold on to the three compasses of data, history, and risk management.


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📌 Sources

Source: AP News, Financial Times, Reuters, FXEmpire, September 2025 reports

References: AP News (Sep 23, 2025), Financial Times (Sep 23, 2025), Reuters (Sep 19, 2025) – Major international media coverage

Compiled from global media outlets: AP · FT · Reuters · FXEmpire (September 2025 reports)