Market Hot Topic Review

Recent macroeconomic environment is improving

Inflation cools down overall: The past two months have shown a significant downward trend. The U.S. CPI in June turned negative month-on-month for the first time in four years, and the core year-on-year growth rate hit a new low in over three years. According to a certain agency's forecast, both will be in a downward channel in the next two years. Housing inflation is accelerating its slowdown.

Job Market: The 4-week moving average of initial jobless claims has risen by about 10% since April, indicating a slight softening in the job market, but overall it remains in a relatively balanced and stable state.

Economic Surprise Index: It has been at a low point for the past two months, indicating that recent economic data has been below expectations more often.

Financial Conditions Index: Shows a continued easing trend, with the level being the most accommodative since the end of 2022.

The above background can be described as a situation favored by the risk asset market, as investors expect the Federal Reserve to take action to support economic expansion. Over time, concerns about inflation at the end of the first quarter proved to be excessive, although inflation in the service sector remains above the central bank's target level, inflation in goods has declined significantly.

As the US dollar weakens and the Federal Reserve begins to cut interest rates, emerging markets and cryptocurrencies may benefit in a backdrop of no recession. If the expected soft landing then turns into a hard landing, there will be a swift shift from equity risk assets to bonds.

Q2 Earnings Season Pressure is Mounting

The current market focus is on the earnings season that has already started, with very optimistic market expectations for the quarter. However, it may be difficult to achieve the surprise levels seen previously, so it is very likely that we will see some profit-taking or sector rotation during the earnings announcements this season.

Wall Street expects S&P 500 earnings to grow by 8.9% year-on-year in Q2, significantly higher than the 5.9% in the previous quarter. The last time there was such a high earnings growth was back in Q1 of 2022, when the Federal Reserve first began raising interest rates, and the earnings growth rate at that time was 9.4%. It is worth noting that the 8.8% earnings expectation is the result of a downward revision. At the end of March, analysts generally expected an earnings growth rate of 9.1%.

Additionally, from the market's short-term reaction in the first quarter, it is very evident that the positive surprises in growth are not as significant as the negative surprises in decline - companies with positive EPS surprises saw an average stock price increase slightly lower than the five-year average, while companies with negative EPS surprises experienced an average stock price decline slightly greater than the five-year average.

From the performance in the first quarter, it can be seen that:

• Within the EPS unexpected value range of "below -40%", the average stock price change is -6.5%.
• The average stock price change within the EPS unexpected value range of "0% to 5%" is -1.2%.
• Within the EPS unexpected value range of "5% to 20%", the average stock price change is 1.7%.
• The average stock price change is 2.7% within the EPS unexpected value range of "20% to 40%."

Based on the market reactions of major financial stocks that have been released so far for the second quarter, the results are even worse than in the first quarter.

Recently, discussions regarding the profitability of AI have increasingly raised doubts in the market. For example, a certain institution recently released a report titled "Generative AI: Too Much Cost, Very Little Return?", in which several experts expressed profound skepticism about the economic potential of generative AI. This is the most pessimistic report I have seen about AI in over a year, and it is worth savoring.

As the big tech stocks emerge from the performance low of 2022, the likelihood of certain hardware companies or car manufacturers maintaining their strong positions after earnings reports is decreasing. A better outcome would be a sector shift from Mag7 to the 493 (the NDX lagged behind the R2K by 6.3% last week, one of the worst relative performances in over a decade), or a shift in the focus of speculation from AI to branch tracks, including humanoid robots and autonomous driving.

From the perspective of the consumer market, the humanoid robot market clearly has enormous prospects, even surpassing AI, because it is difficult for end consumers to pay extra for AI in the foreseeable future, whereas robots could become essential items that every household needs to purchase. Now we are just waiting for the "iPhone moment" to arrive.

According to statistics from a certain organization, investors currently show the following order of interest in big tech: NVDA > AMZN > MSFT > AAPL > GOOGL > META.

Boeing has pleaded guilty

Last week, Boeing agreed to plead guilty to two criminal cases related to the 737 Max. The background of the two cases involves the crashes of two Boeing 737 MAX 8 aircraft in Indonesia and Ethiopia in October 2018 and March 2019, respectively, resulting in the deaths of 346 people. Investigations pointed to the cause of the accidents being related to safety design flaws in the new software system within this model. Boeing intentionally concealed this risk when applying for test certification from the Federal Aviation Administration and did not enhance pilot training, leading to the accidents. According to court documents submitted later on Sunday, Boeing officially acknowledged that there was intentional concealment of safety risks during the application process for FAA certification of the Max model, committing conspiracy to defraud the U.S. government, and the company is willing to face penalties.

Boeing will face fines of up to $487.2 million, but this is the maximum fine allowed by law, and the actual amount will be decided by the judge. Since Boeing reached a deferred prosecution agreement with the Department of Justice in 2021, paying a $243.6 million criminal fine and compensating the victims' families $500 million, the amount due this time is the second criminal fine of $244 million. After this incident, the company is also required to invest heavily in rectifying internal compliance and safety requirements, with at least $455 million to be spent over three years, and will be under the supervision of an independent compliance monitor for three years. Clearly, such a level of punishment has left many citizens dissatisfied, with many saying that $244 million is equivalent to the value of just two 737 Max aircraft for a company as large as Boeing, and that the value of a single life is only $700,000. From a strategic perspective, the global large aircraft manufacturing industry is essentially monopolized by Boeing and Airbus, and it is evident that the U.S. government will not let Boeing suffer too severely.

However, from an investment perspective, this indicates that Boeing's bad news has been fully priced in, which is good for the recovery of its valuation. This scenario is somewhat similar to the guilty plea fine of a certain trading platform in November 2023, after which its token skyrocketed from $200 to a peak of $720.

Market Bets on Republican Victory in November

The derivatives market is now very pessimistic about Biden. After the debate on June 27, the predicted market probability of Trump's victory jumped from 40%-50% at the beginning of the year to about 60%. The probability of the Republican Party sweeping both the House and Senate as well as the presidency has also increased, currently around 50%. The probability of Biden's victory has fallen below 20%.

It is worth noting that a certain organization cited data from a cryptocurrency forecasting platform, which is a reflection of the increasing practicality of crypto applications "breaking out of their circle."

Key points to follow:

• As the expectations for the Federal Reserve's interest rate cuts gradually stabilize, institutional investors' focus is shifting from growth and monetary policy to politics.

• The key is the change in the likelihood of Trump's ascension to power, with investors' concerns focused on potential tariffs, domestic tax policies, and regulatory changes that the Trump administration may implement.

• After Trump took office, the significant increase in tariffs is expected to benefit companies focused on the domestic market, rather than those with international business. The tariffs are expected to slightly dampen U.S. GDP growth, while their impact on import prices may simultaneously push inflation higher (which is contrary to the environment desired by the Fed's interest rate cuts).

• The market has not been greatly affected by political fluctuations recently, seeming to underestimate the uncertainty of the U.S. elections. Although the likelihood of a Republican victory is high, the possibility of changes in the Democratic candidates is also rapidly increasing.

• Investment in commercial equipment has stalled, and companies may delay projects due to concerns about changes in the new government's policies, such as approvals for oil and gas exploration permits or foreign battery manufacturing plants. This political uncertainty makes companies more cautious about investing.

• A significant victory for the Republican Party may lead to the extension of tax cuts and an increase in fiscal spending, although specific details are yet to be clarified, this is the most direct benefit for stocks.

The implied volatility for both upward and downward movements in the SPX options market is very low.

Industries affected by policy changes

• Renewable Energy and Environmental Policy: If Trump is elected again, it is expected that there will be some relaxation in environmental policies, which could be beneficial for traditional energy stocks, while potentially putting pressure on renewable energy stocks.

• Technology and Big Data: The technology industry may face a more lenient antitrust review under the Trump administration, particularly large tech companies, which may benefit from it.

Investment style and market strategy

• Growth and Value: In the current market environment, growth stocks may continue to attract investors' attention, especially in the technology and consumer sectors. However, depending on specific policy changes, value stocks in certain industries, such as finance and industrials, may also show appeal.

• Interest rate sensitive stocks: Considering potential economic policies and interest rate changes, this category of stocks may exhibit significant volatility due to their high sensitivity to interest rate fluctuations.

Wall Street and the crypto world need to "be grateful" to China

China is in a state of deflation, and policy measures have further increased excess capacity. As the world's largest commodity exporter, it is exporting deflation. Its spillover effect contributes to a decline in core commodity inflation rates by about 0.5 percentage points, reducing the core inflation rates in Europe and the United States by about 0.1 percentage points. Although the overall effect is moderate, it provides more room for interest rate cuts for central banks in Europe and the United States this year, which is beneficial for stocks and cryptocurrencies.

China holds a significant market share in multiple key export products. In addition to traditional manufacturing sectors that still play an important role, such as home appliances (59%), clothing and textiles (38%), and furniture (33%). Furthermore, China's manufacturing capabilities and technological levels in high-tech fields have significantly improved, with market shares in lithium-ion batteries and photosensitive semiconductors (cameras, solar energy) reaching 51% and 53%, respectively.

China has adopted an investment-driven economic growth model for many years, which can rapidly enhance production capacity and the total economy in the short term. China's fixed capital investment as a proportion of GDP is significantly higher than consumer spending. This indicates that a large amount of funds is being invested in building new plants, purchasing equipment, and expanding production lines. This model may exceed the growth rate of market demand.

Despite the rapid increase in China's production capacity, global economic growth has slowed, particularly after the global financial crisis, and global demand has not increased in sync. This has resulted in a significant amount of China's capacity being underutilized, further exacerbating the issue of overcapacity.

Industries such as steel, coal, chemicals, and real estate are particularly capital-intensive. The expansion rate of these industries is especially rapid, but they are also the most prone to oversupply.

China's capital expenditure level is nearly 10 percentage points higher than that of other major economies. In US dollar terms, it exceeds that of the United States and the Eurozone by over 85%. Policy-driven excessive investment can easily lead to inefficient resource allocation, with large amounts of funds and resources being投入到低效甚至无效的生产领域，而这些资源本可以用于更具生产力的行业或领域。In the long run, such inefficient resource allocation can hinder the overall growth potential of the economy.

A certain institution predicts that China's PPI will only end deflation in the second half of 2025.

The U.S. interest rate market has shown a high degree of sensitivity to inflation surprises this year, with the 10-year Treasury yield moving by 80 basis points in the three days before and after the CPI release.

Despite the market's confidence in easing inflation in the second half of 2023, unexpected rises in inflation have shaken this confidence, leading to a strong market reaction. After the second half of 2023, the market's expectations for cooling inflation have been muted, but regarding inflation...