Market Overview

Since the third quarter, well-performing assets include the Russell 2000 Index, gold prices, financial stocks, and U.S. Treasuries, while poorly performing assets include Ethereum, crude oil, and the U.S. dollar. Bitcoin and the Nasdaq 100 Index have performed almost flat.

For the US stock market, the current market is still in a bull market, and the main trend remains upward. However, the trading environment in the upcoming months until the end of the year will be relatively lacking in performance themes, and both the upward and downward space for the market will be limited. The market continues to lower its earnings expectations for the third quarter.

Recently, the valuation has pulled back, but the rebound was also quick, with a P/E ratio of 21 still far above the 5-year average.

93% of the companies in the S&P 500 Index have reported actual performance, with 79% of the companies exceeding earnings per share expectations, and 60% exceeding revenue expectations. The stock price performance of companies that exceeded expectations is roughly in line with historical averages, while the stock price performance of companies that fell short of expectations is worse than historical averages.

Buybacks are currently the strongest technical support in the US stock market, with corporate repurchase activity in the past few weeks reaching twice the normal level, about $5 billion daily (annualized at $1 trillion). This buying power may gradually wane after mid-September.

Large technology stocks weakened in mid-summer, mainly due to lower earnings expectations and a decline in market enthusiasm for AI themes. However, the long-term growth potential of these stocks still exists, and prices are unlikely to drop significantly.

There was a time when the market was indeed very bullish. For example, from October of last year to June of this year, we experienced some of the best risk-adjusted returns of this generation (the Sharpe ratio of the Nasdaq 100 index reached 4). Fast forward to today, the stock market's price-to-earnings ratio is higher, economic and financial growth expectations are slower, and the market's expectations for the Federal Reserve are also higher, so it is relatively difficult to expect the stock market to perform as it did in the previous three quarters. Additionally, we have seen signs of large funds gradually switching to defensive themes (for example, both subjective and passive strategy funds have increased their holdings in the healthcare sector, which offers defensiveness and growth unrelated to AI). It is expected that this trend will not reverse quickly, so it is more prudent to maintain a moderately neutral outlook towards the stock market in the coming months.

At the Jackson Hole meeting on Friday, Federal Reserve Chairman Powell made the clearest statement on interest rate cuts so far, indicating that a rate cut in September is a foregone conclusion. He also stated that he does not wish to further cool the labor market and has increased confidence in the path for inflation returning to 2%. However, he still insists that the pace of policy easing will depend on future data performance.

Powell's statement this time did not exceed expectations in a dovish manner, so it did not create much of a stir in the traditional financial market. What everyone is most concerned about is whether there is an opportunity for a single 50 basis point rate cut within the year, and Powell did not hint at that at all. Therefore, the expectations for rate cuts this year have not changed much from before.

If future economic data is positive, the current expectation of a 100 basis point rate cut may even be subject to revision downward.

The cryptocurrency market reacted strongly to this, possibly due to the excessive accumulation by short sellers leading to a squeeze (for example, the recent rapid increase in open positions but contracts often showing negative fees), and the understanding of macro news by cryptocurrency market participants is less uniform than in traditional markets, meaning that the transmission of information is heavily dampened. Many may not even know that Powell is going to speak at the Jackson Hole conference this week. However, whether the current market environment supports the cryptocurrency market in hitting new highs is still questionable. Generally, to hit new highs, in addition to a loose macro environment, there needs to be a willingness to take risks, and the native themes of cryptocurrency cannot be overlooked either. NFT, DeFi, the opening of spot ETFs, and meme coin frenzy all count. Currently, the strongest theme seems to be the growth of the Telegram ecosystem. Whether it has the potential to become the next theme will depend on the performance of these newly issued token projects and what kind of incremental users they bring in.

The surge in the cryptocurrency market is also related to the significant downward revision of last year's non-farm payroll numbers in the United States this week. However, we have already analyzed this in detail in our previous video, and this revision is excessive as it ignores the contribution of illegal immigrants to employment. When initially counting employment, these individuals were included, so this correction is not very meaningful. As a result, the traditional market reacted lukewarmly, while the cryptocurrency market sees this as a sign of substantial interest rate cuts.

From the experience of the gold market, most of the time the price has a positive correlation with the ETF holdings. However, in the past two years, the market structure has changed, and most retail and even institutional investors have missed out on the increase in gold prices, while the main buying force has shifted to central banks.

The data shows that the inflow speed of Bitcoin ETFs has significantly slowed down after April. In Bitcoin terms, it has only grown by 10% in the last five months, which aligns with its price peak in March. If the risk-free interest rate decreases, it is very likely to attract more investors into the gold and Bitcoin markets.

From the perspective of stock positions, earlier this summer, the subjective strategy funds performed quite well, timely reducing positions, and had an opportunity to attack in August. Recently, the speed of replenishing positions has been very fast, and the positions have returned to the historical 91st percentile, but the systematic strategy funds have reacted a bit slower and are currently only at the 51st percentile.

The stock market bears closed their positions during the decline.

In terms of politics, Trump's approval rating has stopped declining, and betting odds are rising. Over the weekend, Trump also received support from Little Kennedy, which may lead to a resurgence in Trump's dealings, generally a good thing for the stock market or the crypto market.

Capital Flow

The Chinese stock market has been declining, but funds with Chinese concepts have been experiencing net inflows. This week, the net inflow reached 4.9 billion USD, setting a new high for the past five weeks and marking the 12th consecutive week of net inflows. Compared to other emerging market countries, China has also seen the largest inflow. Those willing to increase their positions against the current market downturn are either state-owned enterprises or long-term funds, betting that the market will eventually recover.

However, from the perspective of clients on certain trading platforms, after February, there has basically been a continuous reduction in holdings of A-shares, and the recent increase in holdings is mainly in H-shares and Chinese concept stocks.

Despite the global stock market warming up and capital inflows, the low-risk preference money market funds have also seen inflows for four consecutive weeks, with the total size rising to $6.24 trillion, setting a new historical high, indicating that market liquidity remains very ample.

Continuously monitor the financial situation in the United States, which is basically a topic that gets hyped every year. The U.S. government's debt could reach 130% of GDP within ten years, and interest payments alone will reach 2.4% of GDP, while military spending to maintain America's global hegemony is only 3.5%, which is clearly unsustainable.

US Dollar Weakens

In the past month, the US dollar index has fallen by 3.5%, marking the fastest decline since the end of 2022, which is related to the market's increased expectations for Federal Reserve interest rate cuts.

Looking back at the beginning of 2022, the Federal Reserve adopted an aggressive interest rate hike policy to combat inflation, which strengthened the dollar. However, by October 2022, the market began to anticipate that the Federal Reserve's rate hike cycle was nearing its end and might even start considering rate cuts. This expectation led to a decrease in demand for the dollar, causing it to weaken.

The current market seems to be a replay of previous years, except that the speculation back then was too ahead of its time, and today the interest rate cut is about to land. If the dollar falls too much, the unwinding of long-term arbitrage trades may resurface, potentially becoming a force that suppresses the stock market.

Two major themes next week: inflation and Nvidia

Key price data includes the PCE (Personal Consumption Expenditures) inflation rate in the United States, the preliminary CPI (Consumer Price Index) for Europe in early August, and the CPI for Tokyo. Major economies will also release consumer confidence indexes and economic activity indicators. In terms of corporate earnings reports, the focus will be on Nvidia's earnings report after the US stock market closes on Wednesday.

The PCE released on Friday is the last PCE price data before the Federal Reserve's next decision on September 18. Economists expect the month-on-month core PCE inflation to remain at +0.2%, with personal income and consumption growing by +0.2% and +0.3% respectively, remaining the same as in June. This means that the market expects inflation to continue to maintain a moderate growth momentum without further decline, leaving room for potential negative surprises.

NVIDIA Earnings Preview - Clouds Clear, Expected to Inject Strong Confidence into the Market

NVIDIA's performance is not only a barometer for AI and tech stocks but also for the overall sentiment of the financial market. Demand is not a problem for the time being; the key theme remains the impact of the delay in the Blackwell architecture. The mainstream view is that this impact is not significant, and analysts generally maintain an optimistic expectation for this earnings report. Moreover, NVIDIA's actual results have exceeded market expectations over the past four quarters.

The core indicators of several market expectations are:

• Revenue of $28.6 billion, up 110% year-on-year, up 10% quarter-on-quarter.
• Earnings per share of $0.63, up 133.3% year-over-year and up 5% quarter-over-quarter.
• Data center revenue of $24.5 billion, up 137% year-on-year and up 8% quarter-on-quarter.
• Profit margin 75.5% unchanged from Q1

The most concerning questions are:

1. Has the Blackwell architecture been delayed?

An organization analyzed that Nvidia's first batch of Blackwell chips is expected to be delayed by about 4-6 weeks, with shipments anticipated to be postponed until the end of January 2025. Many customers have switched to procuring the H200, which has a very short delivery time. TSMC has begun production of the Blackwell chips, but due to the complexity of the CoWoS-L packaging technology used for the B100 and B200, there are yield challenges, and the initial output is lower than the original plan, while the H100 and H200 use CoWoS-S technology.

However, this new product was not included in the recent performance forecast:

As Blackwell is not expected to enter sales until Q4 2024 (1st quarter of 2025), and Nvidia's official guidance only provides quarterly performance forecasts, the expectations for Q2 2024 and Q