Use one word to describe the overseas market during holidays - "resilience". Despite encountering two major "speed bumps" of CPI and PPI, the overall US stock market has only slightly declined, and this is against the backdrop of historical highs set by the S&P and Dow Jones. In addition, two more prominent performances are that traditional safe haven assets such as US Treasury bonds and gold have both fallen, while non US stock markets represented by Japan and emerging markets have clearly performed better.
How to understand the changes in overseas market mentality behind this "resilience"? We believe that this is mainly due to three underlying clues: a strong belief in economic resilience, confirmation of the direction of easing, and a preference for mid range physical profit expectations and AI market trends.
Clue 1: From a macroeconomic perspective, concerns about recession are gradually diminishing. On the US side, although there was a decline in retail sales data in January, it was more affected by some noise than a warning of recession: firstly, retail sales were not adjusted for inflation, and the negative increase in January commodity prices seriously dragged down retail sales; Secondly, January is often affected by seasonal and climatic factors. From the perspective of the 12 month moving average, the data is actually close to the pre pandemic average level and relatively healthy. Therefore, the market's interpretation of retail sales data is highly likely to overestimate the degree of consumer and economic weakness.
On the Japanese side, although the economy has slowed down, the market's mentality has become more optimistic: Japanese stocks have chosen to "ignore" Japan's declining GDP position, even though the economy has fallen into a technical recession due to "two consecutive contractions", the market has chosen to "believe" in its "body feeling", with an exaggerated increase of 15% from the beginning of the year to the present, and an increase of over 3% in just a few days during the holiday.
Clue 2: From a policy perspective, although the interest rate reduction policy has undergone some twists and turns, the direction of easing throughout the year is basically confirmed to be safe. During the Spring Festival, Vice Governor of the Bank of Japan, Shinichi Ueda, made a loose statement: there will be no rush to raise interest rates, and even if the negative interest rate policy is terminated, a loose financial environment will continue to be maintained to maintain market liquidity. The Bank of Japan's hesitation towards tightening has downplayed market expectations for exiting negative interest rate policies. In the overall loose direction, this has once again ignited market enthusiasm, helping Japanese stocks usher in a new peak.
For the United States and Europe, although the market's expectation of interest rate cuts has been repeatedly suppressed, the interest rate cuts in the second half of the year are basically guaranteed. Especially the Federal Reserve, during the holiday period, although Federal Reserve officials continue to suppress expectations of interest rate cuts: first, Balgin expressed a desire to see "a few more months" of inflation data and had enough patience with interest rate cuts. Moving on to Logan and Bostock's consecutive hawkish remarks, Logan hinted that there is currently no urgent decision to cut interest rates, while Bostock stated that "the Federal Reserve does not urgently need to cut interest rates.".
However, it only prompted the market's expectation of "running ahead" to gradually return to normalcy. With the stable decline of US inflation and the gradual weakening of the economy, the June interest rate cut is still within reach. Therefore, the Federal Reserve's statement has little negative impact on the overall stock market. The unexpected inflation data in January only briefly impacted the US stock market for one day, and the following day, the three major stock indexes generally rebounded and reached new highs. This also indicates that although the expected pace of interest rate cuts in the market has been delayed, the overall direction of easing remains unchanged.
Clue 3: From a market perspective, the optimistic sentiment of rising prices is more comprehensive. US stock investors are not concerned about macro risks:
On the one hand, both the breadth and depth of the current US stock market have been improved, which means that the rise of the US stock market is not only driven by a few technology giants, but funds have also spread from technology stocks to various sectors, and the rise of the S&P 500 is more "comprehensive"; On the other hand, it can be directly observed that the growth of Russell 2000 small cap stocks has significantly exceeded that of S&P, further proving that optimistic sentiment is prevalent in the current US market.
The impressive performance in US stock market financial reports is the confidence. For the US stock market, the stable profit expectation+"irrational" sentiment foam made the US stock market become "hot money". In addition to the strong economic performance of the United States in the fourth quarter, the unexpected financial reports of American companies in the fourth quarter have once again given the market a boost. Among the companies that have already released their financial reports (as of February 15th), approximately 55% of S&P 500 companies have exceeded expectations in revenue, and nearly 80% of companies have achieved unexpected profits, with a total profit growth rate of nearly 5%. The impressive performance of the financial report week has given the US stock market some upward momentum.
The fermentation of AI market is the driving force. Technology stocks that have benefited from the AI market have generally fulfilled their performance, with total profits increasing by over 10%. The AI market continues to catalyze, and except for Nvidia, the seven leading technology stocks have not yet released financial reports. Other companies such as Google and Meta have all delivered impressive results, and their stock prices have been rising all the way, supporting the market with their absolute market share advantage. The overall market optimism is high, and the Federal Reserve's tightening expectations and high inflation expectations have not stopped the upward trend of the US stock market.
Apart from the US stock market, other markets are also experiencing frequent good news. Japanese stocks have benefited from the AI market and improved profit expectations brought about by corporate governance reforms, while European leading stocks have contributed the majority of their gains with their strong profitability, robust balance sheets, and high dividends. The market sentiment continues to spread, with Hong Kong stocks rising sharply at the opening, technology stocks all showing signs of success, and multiple sectors such as media, pharmaceuticals and biotechnology, consumer goods, and automobiles generally rising.
What do you think of the US stock market after the holiday? Although the US stock market has repeatedly hit new highs, it cannot be denied that there is still significant structural risk in the US stock market. On the one hand, the current US stock market is not cheap, and its valuation has reached a historically high level; On the other hand, although the width of the US stock market has improved recently, the proportion of the seven major technology stocks is still too high, and the early gains were overly concentrated in leading technology stocks, and risks still exist. Since the beginning of the year, Tesla has fallen behind among the seven major technology stocks, and any unexpected events such as AI market suspension or performance may cause the US stock market to stall. The next step is to pay attention to the release of Nvidia's financial report and the strength of various economic data in the first quarter of the United States, which will be important variables determining the direction of the US stock market in the future.
For the domestic market, A-shares are expected to achieve a good start. At the beginning of the the Year of the Loong, Hong Kong stocks began to be optimistic: the confirmation of overseas easing expectations in the general direction, news and policy led the general rise of materials and biology and other sectors had a good start. As global risk appetite increases, based on the spillover effect, we believe that A-shares will not completely fall behind. In addition, the change of the chairman of the China Securities Regulatory Commission often boosts market sentiment. The initiative to stack fundamentals is still in our own hands, so we may have more expectations for the rise of A-shares.
Risk warning: The unexpected resilience of the economy has led to the Federal Reserve's return to interest rate hikes, and small and medium-sized banks in the United States have been exposed to risks beyond expectations, dragging down the global market and economy; The US economy has entered a recession beyond expectations, and the Federal Reserve unexpectedly cut interest rates significantly ahead of schedule; Geopolitical tensions and frequent financial sanctions have led to unexpected exposure of financial risks.