Powell: "Stocks Overvalued"... AI Frenzy Cools as All Three Major New York Indexes Fall

AI rally worries, Nvidia-OpenAI circular investment controversy

New York market turns lower on sharp tech stock sell-off

Investor sentiment weakens amid fears of a federal government shutdown

Jerome Powell, chair of the U.S. Federal Reserve (Fed), said on the 23rd (local time) that asset prices, including stocks and other risky assets, are at high levels. After Powell's remarks were reported, the New York market halted its recent gains and closed lower. Criticism of Nvidia's large investment in OpenAI announced the day before also dampened investor sentiment. There are concerns that OpenAI could be tied to buying Nvidia's graphics processing units (GPUs) in the future using Nvidia's investment as a basis.

"Market has priced in expectations"

That day, Powell, speaking at an event in Providence, Rhode Island, said, "By many measures, for example, stock prices are considerably overvalued." In response to a question at the event asking "(In deciding the policy rate) how much weight do you place on market prices, and whether you are showing greater patience toward high asset valuations," he answered as such.

Powell said before that response, "We look at overall financial conditions and ask ourselves whether our policy is affecting financial conditions in the way we intend."

Expectations that the policy rate would be cut ahead of the Federal Open Market Committee (FOMC) meeting held on the 17th–18th had grown, pushing up stock and other asset prices significantly. In fact, even after the FOMC on the 18th cut the policy rate by 0.25 percentage point, major stock indexes continued to rise, repeatedly hitting record highs.

Powell acknowledged that equity levels are high but emphasized, "This is not currently a period of elevated financial stability risk."

Meanwhile, Powell said that even after last week's rate cut he judged the Fed's policy stance to be "still somewhat restrictive." This suggests there could be room for additional rate cuts this year if the view that the labor market slowdown is greater than inflation-related setbacks persists.

Powell also expressed the difficulty of achieving the Fed's dual mandate of keeping inflation low and stable while promoting a healthy labor market. He said, "By 'two-sided risks' I mean there is no path with no risks at all." He added that if rates are cut too much, too quickly, inflation could remain closer to 3% than the Fed's 2% target, whereas keeping restrictive policy for too long could unnecessarily weaken the labor market.

AI rally worries curb stock gains

Following Powell's remarks, doubts about the sustainability of the artificial intelligence (AI) rally spread among investors, unsettling Wall Street. The previous day's announcement of a $100 billion investment in OpenAI had driven sharp gains in shares and the broader market, but the market reversed direction after a day.

CNBC reported, "Some investors pointed out that this investment structure is similar to customer-supplier relationships during the dot-com bubble," and "Other investors questioned whether there is enough energy to support the growth plans of the two major AI companies."

Nvidia's investment structure with OpenAI also rattled investors. The deal takes the form of a 'circular investment' in which Nvidia provides funds to OpenAI, and OpenAI uses that money to buy Nvidia's chips. This effectively ties OpenAI to Nvidia by pledging future sales. Critics say this structure can artificially inflate Nvidia's revenue and is intended to make OpenAI dependent on Nvidia's chip ecosystem.

Bespoke Investment Group said in a client note, "OpenAI is selling itself to its suppliers to finance its own investment," adding, "In other words, Nvidia is effectively buying a stake in its customer to secure future revenue."

Accordingly, Nvidia led the declines, falling more than 3%. As doubts about the Nvidia-OpenAI deal grew, database infrastructure company Oracle also dropped more than 4%.

The tech sell-off affected the broader market as well. On the New York Stock Exchange, the Dow Jones Industrial Average closed at 46,292.78, down 88.76 points (0.19%) from the previous close. The S&P 500 fell 36.83 points (0.55%) to 6,656.92, and the Nasdaq fell 215.50 points (0.95%) to close at 22,573.47.

Investors are also watching the possibility of a shutdown as federal government funding expires on September 30. The Senate last week rejected temporary funding measures from both Republicans and Democrats. On the day, President Trump canceled a scheduled meeting with congressional Democratic leaders, saying, "It cannot be a productive meeting," adding to the uncertainty.

New York = Shin-young Park, correspondent nyusos@hankyung.com