A Correction Is Upon Us

You are starting to see some of these things stack up. And then the question just becomes, are there enough of these things to tip the market over? – Michael Brenner, Asset Allocation Strategist, FBB Capital Partners, quoted in the WSJ Tue 2/18 A1

The Wall Street Journal ran a timely front page article to kick off the holiday shortened week on Tuesday: “Investors Spot Signs of Froth In Markets’ Lengthy Bull Run” [SUBSCRIPTION REQUIRED](Tue 2/18 A1). The article presciently led off with concerns about Palantir (PLTR) as CEO Alex Karp’s interview on CNBC Wednesday afternoon seems to have been the catalyst for the correction. PLTR closed just shy of $125 on Tuesday and is currently trading around $103. Even so, PLTR still trades for about 70x the 2025 revenue guidance it gave at the beginning of this month.

Walmart (WMT) is getting smashed the last two days after reporting earnings Thursday morning. You can quibble about the report but WMT has been overextended and overvalued for a while now and therefore due to come back to earth (see my “WMT Is Overvalued and Overextended Heading Into Earnings” (Nov 16, 2024)). WMT closed Wednesday at $104.00 and is currently trading around $94.50. Even so, it’s still 37x the midpoint of the full year EPS guidance they gave Thursday morning.

The damage is hardly limited to these two stocks. Take a look – for instance – at JP Morgan (JPM), Goldman Sachs (GS) and Constellation Energy Group (CEG) which I found by looking at the top twenty holdings of the iShares US Momentum ETF (MTUM).

Another concern on top of overvaluation is the macroeconomic backdrop. With inflation proving sticky the Fed appears to have cut its rate cutting cycle short and is on pause. There is only a 6.5% probability that they will cut rates at their next meeting on March 19, according to the Fed Futures.