Recently, both the US stock market and the crypto market experienced a severe pullback. At a time when ETH broke through its all-time high and market sentiment was once engulfed in FOMO excitement, the price suddenly took a sharp downturn. In just a few days, ETH plunged below $4,100 from its peak, experiencing a nearly 20% correction. Investors were caught off guard by the rollercoaster of emotions, as optimistic expectations were instantly overshadowed by pessimism. The market began to question: What is the true reason behind this decline? Does it signify the end of the bull market, or is it a healthy correction?

Elevated Valuations, Natural Correction, and Risk-off Sentiment

The recent pullback was not a coincidence but rather an instinctive response from investors to high valuations. Since April this year, the Nasdaq index has been on a tear, with a cumulative gain of over 40%. AI and tech stocks contributed most of the gains, with many stocks surging over 80%. Such a sharp rise made market sentiment highly sensitive, where any uncertainty could serve as a trigger for jittery funds to exit.

Against this backdrop, the uncertainty surrounding corporate earnings reports and Federal Reserve Chair Powell's "Jackson Hole Symposium" last Friday prompted funds to seek safety. Investors were eager to assess the resilience of US consumer spending in the face of inflation and trade frictions through the retail industry's performance. Any slight adjustment in Powell's monetary policy language could influence market expectations for future interest rate paths. In this "precarious position," investors became particularly cautious at the market's highs.

As a result, funds underwent a clear rotation: some profit-taking capital exited tech stocks and flowed into defensive sectors. Industries such as consumer staples, utilities, and real estate showed strength against the tide, highlighting their defensive characteristics. In other words, this round of adjustment resembles the market taking a "deep breath"—after a huge uptrend, funds are seeking a new equilibrium.

However, if this round of decline is simply a natural response to valuation and sentiment, the scrutiny surrounding the AI bubble truly made the market "anxious."

OpenAI CEO Sam Altman publicly compared the current AI frenzy to the dot-com bubble of the past. He pointed out: "When a bubble occurs, smart people get overly excited about some core truth." While Altman still believes in AI's long-term value, he bluntly stated that "some investors will face huge losses," undoubtedly pouring cold water on the exuberant market. Meanwhile, a research report from MIT stated: despite companies' investments of up to $300-400 billion in generative AI, 95% of the companies have yet to see any commercial returns. This conclusion strikes at the heart of the logic behind AI investments—a far-off horizon for large-scale profit conversion. Looking ahead, Altman suggests that AI will follow a path similar to the development of the internet, "going through several notable bubble bursts before eventually achieving lasting transformation."

Altman's warning, combined with MIT's research, quickly shifted market sentiment from "euphoria" to "caution." This is also a key reason why tech stocks and crypto assets simultaneously experienced significant corrections in a short period of time.

The "Inevitability" of Rate Cuts Challenged: Fed Takes Hawkish Stance, Market Focuses on Powell

The minutes of the August 20 Fed meeting also signaled a hawkish tone. In the July meeting, almost all policymakers supported "no rate cut at this time," with only two dissenting voices. The minutes overall reflected internal Fed divisions on the risks of inflation and employment: most officials saw a greater risk of rising inflation, while a few emphasized the more pressing threat of weak employment. Additionally, several officials mentioned that the impact of tariffs on prices had not yet fully materialized and would take more time to be fully reflected in consumer goods and services prices. Currently, there is insufficient evidence to suggest that inflation has peaked. Data indicates that the core PCE price index may rise to 2.9% this month and continue to increase over the next few months, deviating from the Fed's 2% target.

Regarding the economic outlook, some officials anticipate that U.S. economic activity will remain robust, but others expect the second half of the year to continue the low-growth trend seen in the first half. Overall, Fed officials hold differing views on the outlook, but unanimously agree that an immediate rate cut would be premature.

The market's focus is now turning to this Friday, when Fed Chair Powell will speak at the Jackson Hole "Global Central Bankers' symposium." Evercore analyst Julian Emanuel pointed out that Powell may indirectly signal a 25 basis point rate cut in September and maintain a "neutral" rather than overly dovish attitude, which could trigger a short-term 7% to 15% market pullback. The latest data shows that the probability of a 25 basis point rate cut in September has dropped from 94.3% a week ago to 81.9%, although it remains the prevailing expectation, confidence has wavered.

Morgan Stanley believes that Powell's core task in his speech is to break the market's reliance on the "inevitability of rate cuts" and regain control of the policy narrative. The bank expects Powell to continue emphasizing the risk of inflation, ruling out the possibility of a sharp 50 basis point rate cut while leaving room for a modest 25 basis point cut. Nomura, on the other hand, expects Powell not to provide a "firm commitment" on Friday; Bank of America even anticipates that he will uphold a tough hawkish stance and push back against the market's dovish expectations. This uncertainty is also a reason for fund outflows and market declines, as investors await a clear "signal."

Conclusion

Despite the fierce drop this time, it is largely seen as a short-term pullback in a high-level market, rather than a signal of the bull market's end. Berkshire Hathaway, under Buffett's leadership, seems to be sending a notable signal: amid expectations of a peak and fall in interest rates, Berkshire is increasing its exposure to the interest-rate-sensitive housing industry. According to the latest disclosed 13F filing, the company initiated a new position in D.R. Horton, one of the largest residential builders in the U.S., in the second quarter, and added to its holdings in another leading builder, Lennar. Against the backdrop of Fed rate cut expectations, the housing sector and its related industries have gradually shown signs of strength, with the market repricing this sector that has long been suppressed by high interest rates.

Likewise, in the crypto market, the arrival of an easing cycle combined with the ongoing treasury strategy of buying into altcoins like ETH, along with multiple mentions of stablecoins in the Fed meeting minutes, has formed an unprecedented bullish combination. This correction, rather than being seen as a turning point in the bull market, is better viewed as a market's risk-averse response to short-term uncertainty under high valuations. Once the sentiment is digested, funds are highly likely to switch back to offensive mode, propelling a new round of upward movement. In other words, this seems more like a "deep breath" on the crest of a wave rather than the "final chapter" of the bull market.

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