U.S. stock valuations hit the warning line again! The market is walking on thin ice ahead of the Federal Reserve's decision

The recent rebound in the stock market has led to a rise in valuation levels, and with the Federal Reserve about to announce its monetary policy decision, the market can afford no missteps. According to the Zhitong Finance APP, in just a few weeks, investors have shifted from significantly reducing their holdings in risk assets to chasing one of the strongest rebounds in 75 years. Supported by corporate earnings resilience and the glimmer of a trade agreement, stock market valuations have returned to high levels, especially in the United States. The market generally expects the Federal Reserve to maintain interest rates at its meeting on Wednesday. Data from Goldman Sachs shows that the options market anticipates a 1.1% intraday volatility in the S&P 500 index following the announcement. Investors will closely watch Federal Reserve Chairman Jerome Powell's speech, particularly his remarks on the impact of tariffs on the economy, to gauge the central bank's future policy path. Florian Ielpo, head of macro research at Lombard Odier, stated, "A hawkish surprise could temporarily pressure cyclical assets. Given the recent U.S. data showing inflationary pressures, the likelihood of a dovish surprise is extremely low." He also emphasized that observing how the Federal Reserve uses its balance sheet to stabilize the bond market will be a key focus. Quantitative easing (QE) has traditionally been a tool to address uncertainty and volatility in the stock and bond markets during economic downturns. If policymakers hint at a possible restart of QE, it would extend the current bullish logic—this is particularly important after a strong rebound in the stock market. According to data, the probability of a U.S. recession has risen to 40%. Max Kettner, leading a team of strategists at HSBC, stated, "Leading indicators suggest that hard data may begin to deteriorate in the coming months. At this week's FOMC meeting, the Federal Reserve is more likely to adopt a wait-and-see approach, which will dampen the dovish expectations of those betting on 'Fed put options.'" Traders currently expect the Federal Reserve to start cutting rates three times this year beginning in July. However, this expectation hinges on the deterioration of the labor market, a slowdown in economic growth, and the absence of inflationary pressure from import tariffs. In addition to central bank policies, other factors have led some investors to believe that the stock market still has upward potential, at least in the short term. Andrew Tyler, leading the market intelligence team at JP Morgan, stated that the S&P 500 index is more likely to reach 6,000 points in the short term rather than pull back. They cited positive catalysts such as better-than-expected earnings season, favorable trade news, stock buybacks, and bullish sentiment among retail investors. Tyler's team believes that 6,000 points will be "another short-term peak," but they hold a more cautious view on the medium-term trend. "Although negative rhetoric regarding the trade war may have peaked, we are at the initial stage of an economic slowdown."