Stocks edged lower on Tuesday as the second-quarter rally cooled with investors jittery ahead of Powell’s testimony later in the week. Treasuries rose. US equities pared losses after the S&P 500 closed in on a 1% drop, the stocks gauge had traded at 14-month high last week. The tech-heavy Nasdaq 100 wobbled as shares of Tesla Inc. buttressed both benchmarks from deeper losses. Nike Inc. fell on inventory concerns while PayPal Holdings Inc. climbed after reaching a loan accord with KKR & Co. Investors caught between fear of missing out and concerns markets have run too far, too fast are contending with overblown valuations and hawkish signals from the Federal Reserve. Bullish positioning in US equity futures grew last week, taking it to the most extended levels for the S&P 500 and Nasdaq 100 in data going back to 2010, according to Citigroup strategists. The AI frenzy has been driving much of the recent gains and is sure to be a topic during second-quarter conference calls. “The issue is going to be: to what degree does that show up in fundamentals?” Scott Chronert, global markets strategist at Citigroup, told Bloomberg Television. Earnings estimates have also been ratcheting higher. “What we’re going to run into is this disconnect with how hard the market has run versus where earnings expectations are,” he said. The path of US monetary policy is another wild card. Federal Reserve Chair Jerome Powell will give his semi-annual report to Congress on Wednesday. Policymakers at the Fed kept interest rates unchanged at their latest meeting but warned of more tightening ahead. Investors also await the outcome of policy meetings in Turkey, the UK and Switzerland. John Hancock Investment Management co-Chief Investment Strategist Matthew Mishkin warns about the lack of risk being priced into the market during an interview with Lisa Abramowicz on “Bloomberg The Open. “Our skepticism around the sustainability of the rally in US market-cap weighted indexes stems primarily from continued investor belief that the Fed is bluffing on holding rates higher for longer,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note. “If a favorable soft landing does materialize, the Fed will have no incentive to cut rates, especially if labor markets are still relatively resilient,” she added. “‘Goldilocks’ is at risk. Watch real rates, which would likely creep higher amid a strong economic soft landing.” The Fed decision last week came with forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year. That contrasts with market pricing for some 20 basis points of tightening in the remainder of the year. “Generally speaking a high-multiple environment is only accompanied by a declining policy rate when earnings have collapsed,” Mike O’Rourke of JonesTrading wrote. “It will take a reality check in equities along with economic headwinds before rate cuts emerge. High stock multiples and a high policy interest rate are not a relationship that can be sustained in the long term.” US Treasuries yields traded lower after an earlier bounce amid an unexpected surge for housing starts in May, the most since 2016. The yield on the 10-year fell 4 basis points to 3.72% while the policy-sensitive two-year was at 4.68%. “This is strong data,” Sonal Desai, chief investment officer for Franklin Templeton Fixed Income, told Bloomberg Television. “It continues to feed into the narrative that housing, new starts, are not going to be the first place which collapsed.”