Guotai Junan Securities: U.S. stocks fall, an adjustment unrelated to the macroeconomy

According to the Wise Finance app, Guotai Junan Securities released a research report stating that it is difficult to find reasons for the decline in US stocks from a macro perspective. The rise in US stocks this year actually shows signs of being "desensitized" to macro factors. Against the backdrop of stable US bond yields, the stock market has almost completely ignored the power from the "denominator end" and shifted to the numerator end - focusing on the direction of industry trends. It may be more honest to look for the reasons and context of the adjustment in the US stock market from the perspective of market trading structure and the industries themselves.

US stocks continued to decline, with the Nasdaq 100 (.NDX.US) falling 3.59% overnight, marking the largest daily decline since December 2022, and the volatility index soaring. Mid-cap stocks showed relative strength, with the S&P 500 (.SPX.US) falling 2.27%, but the equal-weighted S&P (SPGI.US) only dropping 1.17%. The semiconductor index SOXX plummeted by 5.32%, retracing nearly 15% from its high.

Is this the peak for US stocks this time? The main concerns for US stocks now are: whether the growth premium of large-cap stocks stimulated by AI can be digested by the application of AI, assuming that there is no revolutionary breakthrough in ChatGPT5 early next year. Based on the current level of large models, only by improving the AI response speed, can these applications support a $10 trillion consumer market? Some market participants believe that miracles are rare after all, and the breakthrough of GPT3.5 is the result of decades of accumulation. The probability of another exponential breakthrough in 2 years is very small. Therefore, the market needs to be prepared, as the development of AI in the next few years may only see quantitative breakthroughs without qualitative breakthroughs. Under this premise, it is more reasonable to layout the AI sector.

The US Markit Manufacturing PMI recorded 49.5 in July, hitting a 7-month low, sparking concerns about the excessive slowdown in US economic growth. Former Fed Vice Chairman Dudley changed his stance to support a rate cut in July: the Fed needs to act now. Historical data shows that with the current degree of cooling in the labor market, the downturn tends to accelerate, delaying rate cuts will increase the risk of recession. In the bond market, accelerated rate cut expectations were further digested, with the yield on the 2-year US Treasury falling by 8.1 basis points to 4.41%, indicating that the market is increasingly betting on a rate cut in July. At the same time, the bet on a rate cut in September has exceeded 100%, meaning that a 25 basis point rate cut in September is almost certain for the market.

However, the overnight yield on the 10-year benchmark Treasury rose by 2.2 basis points to 4.27%. After briefly breaking through the 4.2% level, the 10-year US Treasury once again approached the 4.30% mark. It seems difficult to define signs of a recession in the US economy to a certain extent. Looking at the trends of the 2-year and 10-year Treasury yields, the possibility of an inverted yield curve disappearing seems greater. From another perspective, if the US Treasury yield curve tends to normalize, it seems that trading on the US recession has receded. The latest GDPNow data released yesterday also shows that the US economy's growth rate in the second quarter will be around 2.6%, a significant increase from the low of 1.5% earlier this month In fact, it is difficult to find reasons from a macro perspective for the decline in the US stock market. The rise in the US stock market this year seems to have been "desensitized" to macro factors. Specifically, the market did not see the expected interest rate cuts, but the US stock market continued to rise driven by the technology sector. During this process, the trend of the 10-year US Treasury bond has been relatively stable, and there doesn't seem to be much indication or impact on other asset prices. So far this year, the 10-year US bond yield only had an impact on the stock market in the early second quarter. At that time, due to doubts about interest rate cuts, the 10-year US bond yield once broke through 4.5% and approached the 4.8% level, putting short-term pressure on the stock market. However, as the US bond yield gradually stabilized, the stock market almost completely ignored the influence from the "denominator end" and turned to the "numerator end" - focusing on the direction of industry trends. From this perspective, the current adjustment in the US stock market is mainly driven by the AI sector and the Nasdaq, and yet, the Nasdaq's gain so far this year still exceeds 15%, while the Dow Jones Industrial Average (.DJI.US) is only at 5.7%. Therefore, looking for the reasons and context of the adjustment in the US stock market from the market trading structure and the industry itself may be more honest to oneself