The US stock market has recently entered a downward trend, with all seven tech giants falling. Goldman Sachs analysts previously issued a warning: the summer adjustment has begun. In addition, Bridgewater China's latest forecast suggests that the US economy is likely to continue growing, but currently the attractiveness of US risk assets seems average, and the actual challenges faced by US investment portfolios are greater than imagined.
Seven tech giants suffer heavy blow
The seven major tech companies in the US stock market have recently experienced a decline across the board - Nvidia's stock price, which has tripled in a year, has fallen to its lowest point in two months and has since rebounded by over 17% from its peak; After Tesla's unexpected second quarter financial report was released, its market value evaporated by over $90 billion in a single day; Apple, Microsoft, Google and other stock prices have all experienced varying degrees of decline.
Under the drag of technology stocks, the US stock market has undergone a comprehensive adjustment, with the Nasdaq, S&P 500, and Dow Jones Industrial Average experiencing a cumulative decline of over 3% within a week. China International Capital Corporation (CICC) warns that once the decline is significant, it can easily lead to an amplification of trading volume, triggering CTA (Commodity Trading Advisor Strategy), VIX (Market Volatility Index) trading, etc. In addition, according to reports, Goldman Sachs analysts have warned that the US stock market will face a summer correction, and if bears dominate, the US stock market will continue to decline in the coming month.
Some market insiders believe that we should approach the seven tech giants with caution. Raheel Siddiqui, Senior Research Analyst at Lubomi Global Equity Research, stated that the rise of the seven tech giants has caused distortions within and across the US stock market. The distortions have intensified and may pose greater potential threats when they are lifted.
US stock market may face the risk of 'economic growth panic'
Since July, the S&P 500 index has shown a significant downward trend in its 2024 annual profit forecast. According to data from CITIC Securities, as of July 19th, the S&P 500's annual profit growth rate forecast has decreased by 0.5 percentage points from the end of June to 9.9%; If the seven tech giants are excluded, the profit expectations of the remaining constituent stocks have also been lowered by 0.5 percentage points to 5.7%.
The price to earnings ratio and other valuation indicators of the US stock market are already at historically high levels. Combined with the current pessimistic sentiment of US stock investors, the market has begun to widely focus on whether the rate of valuation decline will exceed the rate of profit growth, leading to a significant correction in stock prices. Morgan Stanley's Chief Investment Officer and Chief US Equity Strategist Michael Wilson stated at the end of June that the US stock market is facing three potential risks.
One reason is that inflation and economic growth in the United States have accelerated again, leading the Federal Reserve to reconsider raising interest rates. This situation is currently unlikely to occur, and the minimum risk of producing such a result is already reflected in bond and stock prices.
Secondly, the deterioration of liquidity conditions has led to the outflow of funds from the US stock market. However, the current liquidity risks are not sufficient to raise concerns.
Thirdly, the market's panic about economic growth is enough to transform poor economic data into unfavorable news for the overall P/E ratio of the stock market. This is the most likely risk to occur in the US stock market, and our communication with clients has confirmed this viewpoint. In this situation, high-quality large cap stocks may perform relatively well, while defensive stocks may perform better with smaller declines, "said Michael Wilson.
The investment challenges in the United States are bigger than imagined
The US economic activity data has mainly shown unexpected declines in recent months, triggering market concerns about a rapid economic slowdown, but last week's retail and industrial output data eased this concern.
The latest forecast from Bridgewater China suggests that the US economy is likely to continue growing, and some weak data is unlikely to spiral and worsen, affecting the overall economy. But currently, the attractiveness of risk assets in the United States seems average, and the actual challenges faced by US investment portfolios are greater than imagined.
In the past period, the returns on risky assets in the United States have been good, fully reflecting optimism about the future. The possible result of this is that as long as the Federal Reserve's easing is slightly lower than market expectations reflected in pricing, it will lead to a decrease in prices. Similarly, the expected profits brought about by the progress of artificial intelligence have also been reflected in the current pricing of related stocks, which limits the risk premium that investors can obtain.
However, BlackRock holds a relatively optimistic attitude towards US technology stocks. It stated that the unexpected decline in US CPI data in June has reignited market expectations that the Federal Reserve will cut interest rates as soon as possible, causing small cap stocks to rise. It is expected that this rebound will not last long, as the Federal Reserve may keep interest rates high for a longer period of time in the face of persistent inflationary pressures.
BlackRock believes that currently, structural changes such as artificial intelligence are driving market changes. Relying solely on single data such as CPI cannot make a comprehensive judgment on market trends, and it is expected that large technology companies will continue to be the key drivers of US stock earnings growth. Therefore, it is recommended to continue overbooking opportunities related to US stocks and artificial intelligence themes.