September Stock Correction? The Market Expects Only a Bull Run

The bubble is approaching. The doubts and fears voiced by investors are, paradoxically, revealing a deep undercurrent of expectation for further gains. On fundamentals alone, the bubble narrative looks flimsy: inflation remains sticky, employment is deteriorating, and consumption shows early signs of weakness. Yet markets do not move on numbers alone. Political pressure, excess liquidity, and a powerful mix of hope and fear are shaping prices. At this moment, we must view the market with two lenses. One is fundamentals; the other is sentiment.

1. Inflation – Illusions and Unpassed Costs

August’s Producer Price Index (PPI) came in at -0.1%, a sharp contrast to July’s shocking 0.9%. On the surface, this looked like a sign of stabilization. But the details tell a different story. The Trade component dropped -1.7%, a swing of 2.7 percentage points in a single month. This shows that firms failed to pass higher costs and tariffs onto consumers. What looks like disinflation today may actually be profit compression tomorrow—an environment where margins erode and employment weakens.

Consumer Price Index (CPI) data reinforces the concern. Headline CPI rose 0.4% month-on-month, with housing costs climbing again. The apparent disinflation is less a victory than a mirage, hiding structural pressures building beneath the surface.

2. Employment – Cracks Emerging

These inflation dynamics flow directly into the labor market. Initial jobless claims on September 11 surged to 263,000, far above expectations of 235,000 and the highest since 2022. The four-week average is trending steadily higher. Meanwhile, ADP nonfarm payroll growth has slowed by nearly half compared to the prior month, and the unemployment rate rose to 4.3%—the highest since 2021.

This is not a seasonal blip. It is a classic chain reaction: companies unable to raise prices see profits shrink, and the first adjustment comes through cuts in hiring and employment. Inflation and labor data may appear separate, but in reality they are tightly connected signals of strain.

3. Consumption and Growth – The Last Line of Defense

Even so, the economy has not collapsed. Consumption continues to act as the last line of defense. Retail sales growth slowed from 0.9% to 0.5%, but remains positive. GDPNow estimates put Q3 growth at 3.1%, above consensus, while the services PMI held firm at 52.

This creates a paradox: employment is weakening, yet consumption remains resilient enough to keep growth alive. But this is a fragile equilibrium. If consumption falters, the economy loses its final buffer and recession risks intensify sharply.

4. Liquidity – A Tug-of-War Between Government and Markets

While consumption props up growth, liquidity dynamics are creating new tensions. Reverse repo balances have collapsed toward zero, removing an important shock absorber from the system. At the same time, the Treasury General Account (TGA) stands at $667 billion but must reach $850 billion by month’s end. Roughly $200 billion will have to be drained from the market.

In the short term, this represents a liquidity shock. But the broader picture is more complex. M2 liquidity remains elevated, meaning that even as the government attempts to pull cash from the system, markets are still awash with capital. The likely outcome is volatility: a short-term hit followed by a rebound—precisely the rhythm of an early bubble phase.

5. Sentiment – A Self-Fulfilling March Toward a Bubble

It is here that the bubble logic becomes clear. Fundamentals flash warning signs of slowdown, but investors have chosen a different narrative. CPI at 2.9% year-on-year is interpreted not as sticky inflation but as proof that “inflation fear is contained.” Weakening employment is reframed as “a justification for pre-emptive rate cuts.”

Politics adds fuel to this shift.

The Trump administration has staked its agenda on reshoring manufacturing and dominating future technologies. A buoyant market becomes a policy tool, reinforcing the push for growth at any cost. This explains why markets have priced in at least three, and possibly four, rate cuts by year-end. Sentiment and politics are merging, pushing the market to ignore fundamentals and accelerate into a bubble.

6. Conclusion – The Early Stage of a Bubble, and the Strategic Turn

In summary: inflation pressures have not disappeared; employment cracks are spreading; consumption stands as the final buffer; and liquidity is entering a volatile tug-of-war. On fundamentals, the signals are recessionary. Yet sentiment and political momentum have converted those same signals into a bullish story of rate cuts and liquidity abundance.

K3 Lab has viewed September as a corrective phase, and that possibility remains. But increasingly, market behavior is being driven less by fundamentals and more by sentiment. The strategic implication is clear: in the short term, investors must participate in the bubble. Reallocating 30–50% of rebalanced capital back into equities, Bitcoin, and Ethereum is justified by this transition.

At the same time, participation must come with an exit plan. Bubbles are opportunities, but also traps. The defining theme of Q4 is therefore: “Engage the bubble, but prepare the exit.”