The U.S. economy is still strong and solid.

The economic recovery became apparent as U.S. GDP was confirmed at 3.8% in the second quarter, but the market reacted to it as a burden on valuation.

That’s because we’ve seen the solid economy as a weakening expectation for a rate cut. The upside catalyst for the current market is expectations for liquidity.

Since Fed Chairman Jerome Powell declared a “resumption of the rate-cutting cycle” at the Jackson Hole meeting in August, the stock market has seen explosive gains in small and medium-sized growth stocks, especially profitless companies.

After all, the upside over the past two months has been a liquidity rally, not a fundamental one. The question is now, will the market be able to afford the high valuations it has created over the past two months.

The S&P 500’s 12-month forward price return is now 22.9x, close to the level of dot-com bubbles and pandemic rallies. It’s also the highest since 1929, when all valuation metrics are put together.

Can the market really rationalize such an overvalued market? The question is, members’ comments this week show that opinions within the Fed are at odds with each other.

Now the market enters October, the worst seasonality. The cryptocurrency market is seeing billions of dollars in positions being liquidated ahead of the expiration of large options amounting to $22 billion this week.

Last week, triple-witching has brought investors back to repositioning. The fourth quarter coincides with a time when historic levels of overvalued markets and tariffs, along with seasonal volatility, will finally impact inflation.