Stephen Roach: Fed is concerned about shifting risks, U.S. equity market faces correction

Federal Reserve Policy and Economic Outlook - The U.S. Federal Reserve is expected to cut interest rates as early as September despite persistent inflation and weakening growth indicators [1][3] - Fed Chair Powell has indicated concerns about a fragile labor market, suggesting a potential rise in unemployment [3][6] - The Fed's policy adjustments will be data-dependent, particularly influenced by labor market and inflation statistics [5][6] Market Conditions and Valuations - U.S. equities are near record highs, with significant valuation concentration in a few large-cap tech stocks, particularly the "Magnificent Seven," which account for approximately 35% of the S&P 500 market capitalization [1][11] - Current market concentration risk is about six times greater than that observed before the dotcom bubble burst in March 2000 [11] - There are concerns that the U.S. equity market is overvalued, driven by excessive bets on AI technology [10][12] Economic Risks and Consumer Demand - The U.S. economy is showing signs of slowing, with consumer demand growth at about half the rate of previous years [7][8] - Factors contributing to potential economic downturn include tariff hikes and a possible bubble in AI infrastructure spending [8][12] - A correction in the stock market is anticipated within the next six months due to sluggish consumer demand and overextended AI valuations [14] Political Influences on the Federal Reserve - Political pressures on the Federal Reserve, including recent actions by President Trump, pose a threat to its independence [17][19] - The potential removal of Fed governor Lisa Cook raises questions about the limits of presidential authority over the central bank [17][18] - The Supreme Court has previously underscored the Federal Reserve's independence from political influence, but ongoing challenges may arise [19]