Market pullback: Healthy reset, not bursting stock bubble

Key takeaways

Healthy reset

We don’t view the pullback as a bursting stock bubble, but rather a healthy reset following a sizeable advance.

Policy uncertainty

Hawkish commentary from the Federal Reserve wasn’t expected. Policy uncertainty has tended to amplify volatility.

Opportunity

We believe market leadership has the potential to broaden to cyclical sector, value-oriented, and smaller-cap stocks.

Investors had appeared to be steeling themselves for a market pullback. After a nearly uninterrupted 38% advance from the Liberation Day bottom on April 8,¹ conversations about a stock bubble and stretched valuations have grown louder. That backdrop may have made last week’s pullback feel inevitable. The unwind was concentrated in mega-cap growth names, the very stocks that powered the rally.² Ironically, many of these companies, including Netflix, Palantir, Microsoft, and Alphabet, delivered strong earnings beats, yet their shares faltered. To us, this isn’t about broken business models but rather skepticism toward lofty valuations. That’s why we don’t view it as the bursting of a stock bubble but rather as a healthy reset following a sizeable advance.

Policy uncertainty

Looking beyond valuations, policy uncertainty tends to amplify market volatility. While the government shutdown captured much of the recent attention, the greater source of uncertainty has been the split in the Federal Reserve (Fed), which delivered more hawkish commentary than investors anticipated. It may have been easier for the Fed to adopt a less dovish tone during a period when official economic data was unavailable.

Post-shutdown data

The US government has reopened, finally, and data releases will resume, but greater clarity won’t be immediate. The September US data will be released shortly — assuming the government IT department can quickly deal with all the “I’ve forgotten my password” requests. But the October data will likely be highly compromised or lost to time. The data collection process is highly manual, so much can’t be retroactively collected. That’s why we believe October and November’s official data should likely be treated with skepticism.

This leaves an already split Fed still relying on alternative data to make its December decision. Private sector labor market data has pointed to softness but not collapse.³ We think that’s enough to cause the Fed to likely err on the side of further easing. Other data that we trust continues to point to a robust corporate sector. Companies continue to report earnings growth better than consensus forecasts.⁴

Meanwhile, the end of the shutdown means employees will receive back pay, and federal layoffs will be reversed. It also appears that Transportation Security Administration (TSA) officers, who worked without pay during the shutdown, will receive $10,000 bonus checks. That means federal workers should be able to spend on Thanksgiving, Christmas, and other holidays, but we’ll be watching for signs in consumption data throughout the holiday month.

Still favorable backdrop

In our mind, this leaves the backdrop for risk assets still favorable. Yields are low,⁵ oil prices⁶ and inflation expectations remain contained,⁷ our Global Leading Economic Indicator points higher,⁸ and a US monetary policy easing cycle has commenced. Monetary easing, combined with ample fiscal support next year, should help the US economy regain momentum. In a recovery phase, we believe market leadership is likely to broaden beyond mega-cap growth. Cyclical sectors, including financials (large banks have had strong performance recently⁹), along with value-oriented and smaller-cap stocks, have the potential to participate more meaningfully, in our view. Additionally, non-US dollar assets stand to potentially benefit as global growth stabilizes and policy divergence narrows.

We remain mindful of valuations, but don’t believe this is a bubble. Instead, we see an opportunity for investors to position portfolios toward better valuation profiles and cyclical exposure as the recovery unfolds.

What to watch this week

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Originally Posted on November 17, 2025

Market pullback: Healthy reset, not bursting stock bubble by Invesco US

Footnotes

1. Source: Bloomberg L.P., Nov. 14, 2025, based on the post-Liberation Day April 8, 2025, trough to Oct. 28, 2025, record high of the S&P 500 Index.
2. Source: Bloomberg L.P., Nov. 13, 2025. The Bloomberg Magnificent 7 Index declined 4% from Nov. 10, 2025 to Nov. 13, 2025.
3. Source: Automatic Data Processing, Oct. 13, 2025, based on the ADP National Employment Report seasonally adjusted private nonfarm level change.
4. Source: Bloomberg L.P., Sept. 30, 2025, based on the earnings beats of the companies in the S&P 500 Index.
5. Source: Bloomberg L.P., Nov. 13, 2025, based on the 10-year US Treasury rate.
6. Source: Bloomberg L.P., Nov. 13, 2025, based on West Texas Crude Oil spot price. West Texas Crude is a type of light, sweet crude oil that comes from the US.
7. Source: Bloomberg L.P., Nov. 13, 2025, based on the 3-year US Treasury inflation breakeven. Inflation breakeven refers to the inflation expectation implied by the difference between the yield on a nominal US Treasury bond and the yield on a Treasury Inflation-Protected Security (TIPS) of the same maturity.
8. Source: Invesco, Oct. 31, 2025, based on Invesco’s proprietary Global Leading Economic Indicator, a forward-looking measure of the growth level in the economy.
9. Source: Bloomberg L.P., Nov. 13, 2025, based on the performance of the S&P 500 Banks Industry Group GICS Level 2 Index, a market index that tracks the performance of banks within the S&P 500, based on the Global Industry Classification Standard (GICS). It advanced 45.18% from the April 8 post-Liberation Day bottom to Nov. 13, 2025.