Equity futures are getting a nice overnight bounce-back after an initial selloff in Microsoft (MSFT) shares Tuesday afternoon. It’s probably not a coincidence we’re finally getting some dip-buying ahead of Jerome Powell and the FOMC on Wednesday, given the softer tone we’ve heard from the Fed chair around improving inflation data. If there’s one thing that could tourniquet the big-tech bleeding, it would be confirmation that our central bank is preparing for rate-cuts.

Investors should be wary of some whiplash before the weekend arrives. Getting a relief trade in stocks like Microsoft makes some sense, but the market still has two unresolved issues.

The first is that mega-cap valuations are just still too high. In particular, the consumer-facing companies Apple (AAPL), Microsoft, and their suppliers, which are trading at a forward valuation in the mid-thirties. That's effectively the most expensive these stocks have ever been. Selling them off into earnings raises the odds of a bounce-back, but the challenge remains to justify existing prices that appear to assume a big product refresh cycle from consumers.

That's where the first unresolved problem bleeds into the second. Assuming consumers are going to fork over thousands of dollars for new A.I.-enabled phones and computers is a bit of a stretch considering the deterioration in the economy this year and the overwhelming evidence of cost-saving measures that showed up as low down the cost spectrum as McDonald’s (MCD), which saw their first decline in sales in years.

That's where this entire three-week rotation starts to break down logically. There is clearly great enthusiasm over the prospect of a rate-cutting cycle by the Fed, but typically that downshift in rates coincides with late-cycle slowing in the economy – not a bullish thing for small-caps and the highly cyclical sectors and companies that have been leading. Yield curve uninversion and the near-triggering of the Sahm rule both point toward further slowing, not acceleration, in the economy.

Powell is likely to acknowledge this with a softer tone on policy today, but it's almost impossible for him to surprise to the upside with the market currently pricing in 100% chance of cuts this year, so I'm not convinced that's an obviously bullish event. The most important item now is jobs on Friday – bulls should really be rooting for a positive surprise to justify much of this month’s rotation.

Tune in live from 8 a.m. to 5 p.m. ET, or anytime, anywhere, on‑demand.

Or stream it via thinkorswim® and thinkorswim Mobile, available through our broker-dealer affiliate, Charles Schwab & Co., Inc

Please do not reply to this email. Replies are not delivered to Schwab Network. For inquiries or comments, please email [email protected].

See how your information is protected with our privacy statement. 

Charles Schwab and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions. Schwab Network is brought to you by Charles Schwab Media Productions Company (“CSMPC”). CSMPC is a wholly owned subsidiary of The Charles Schwab Corporation and is not a financial advisor, registered investment advisor, broker-dealer, or futures commission merchant.