US Stocks: Was scary, but now back to normal?

After a series of incidents such as the delay of NVIDIA Blackwell, the shock of giants, the decline in employment, and the interest rate hike of the yen, the market carefully reviewed that the U.S. economy has its own operational inertia, not a situation of "clear skies one second, and a storm the next".

As mentioned in the last strategy weekly report "Ghost Stories Keep Coming in U.S. Stocks, Is There No Bottom Line for the Downside?" by Dolphin Jun, it was also mentioned that the employment and unemployment data in July, due to weather disturbances, do not need to be taken too seriously. The adjustment in the U.S. stock market seems more like an opportunity to kill valuations under the backdrop of continuous rise, where various "ghost stories" are put together. After the killings, as long as the economic situation does not sharply decline but rather lands softly, with the start of interest rate cuts, the risk in the U.S. stock market is likely to decrease.

Furthermore, the economic data following July, whether it is prices or social zero, are pointing towards an economic soft landing rather than a recession:

I. Consumer locomotive: Slowing down, not collapsing

When the U.S. June social zero came out, the seasonally adjusted month-on-month total was negative growth. Some people, without looking at the detailed structure, immediately claimed that the U.S. consumer locomotive had stopped. However, in July, they were proven wrong because the largest category in social zero, automobiles and auto parts retail, which has fluctuated significantly month-on-month, saw a substantial rebound in growth.

Moreover, other optional consumptions such as 3C, electronics, building materials, gardening, and even the continuously sluggish catering in recent months have started to recover. Essential consumptions like food and beverages, healthcare, daily necessities, etc., have also accelerated their growth this month.

If we smooth out the monthly fluctuations and look at the changes from the beginning of the year until now, it is still very obvious that essential needs are resilient, while optional consumptions such as automobiles, furniture, sports hobbies are generally weak, and the trend of slowing consumption growth in catering, rather than a collapse or collapse, is gradually weakening.

II. Another month of "good news" on inflation

The data in June raised concerns about whether inflation had gone too far, but in July, with housing costs returning to a 0.4% month-on-month increase and pushing core CPI from 0.06% back to a safe range of 0.17%, the consecutive three months of 0.2% core price month-on-month growth should give the Federal Reserve enough confidence to cut interest rates

Especially, the recent decline in CPI seems to be more sustainable: besides food and energy, two major categories with high volatility that have already leaked inflation, the continuous negative growth in commodity prices seems more like deflation. In addition, core services (excluding housing costs) are also clearly declining. For example, key medical and transportation prices seem to be trending downward over the past three months.

However, what remains relatively uncertain, in the view of Dolphin, are some price sectors with a heavier "labor cost" content, such as education, other personal services, and garbage collection.

But with the current rapid increase in labor supply and the gradual rise in unemployment rate, wage growth is also returning to a gradually controllable range, with nominal wage growth of only 0.2% in July, staying within the safe zone of monthly growth.

Looking at the overall inflation data for July, it appropriately points towards a path where the U.S. economy is more likely to experience a soft landing next, rather than a direct recession.

At the same time, combined with various trading platforms covered by Dolphin in this earnings season, whether it's Amazon's revenue guidance, Airbnb's quarterly performance and guidance, or even the implied weakness in North American orders in Uber, all confirm that consumption and economic growth are gradually weakening. However, this weakening, supported by healthy household balance sheets, seems more like a slow and natural process rather than a sudden storm.

What can be felt at the micro level is a "soft landing" of the U.S. economy, rather than a non-landing or a hard landing.

III. After the big adjustment, what are the opportunities for Chinese and American stocks respectively?

In the soft landing scenario, the growth rate of the numerator EPS is slowing down, but the expectation of the risk-free rate in the denominator is also declining under the leaked inflation and rate cut expectations. After the recent social zero and price data, the market slightly raised the expectations of rate cuts. Currently, the expected rate cuts are two to three times within the year, which is within a basically reasonable expectation. To some extent, at least the rate cuts for the year have been fully priced in, and the previously overvalued high expectations have also converged In this case, Dolphin prefers to seek essential assets with a relatively high sensitivity to discount rates, and a relatively slow growth rate at the numerator end, or assets with overseas incremental growth, or overseas markets that can offset the slowdown in North American business and hedge against the negative impact of the weakening US dollar.

In addition to the well-known tech giants, which have nearly 50% of their revenue coming from overseas to hedge against exchange rate losses due to the weakening US dollar, some high-quality niche giants, such as Uber, which performed well in this quarter's financial report, have overseas operations with good growth potential. In addition to hedging the weakness in North American business, they have also boosted the overall business growth. Moreover, their current investments do not seem as large as those of the US stock giants.

And in the current US interest rate cut expectations trading, Chinese concept stocks did not benefit significantly. However, Dolphin believes that after the US interest rate cut starts, there may be a slight opening up of the interest rate cut space for the Chinese Yuan, which may help alleviate the current high actual borrowing costs and expectations of a weak economy.

Furthermore, in the second half of the year, there is hope that government fiscal spending will catch up. With the economy not further declining and the gradual release of negative expectations from the financial report season, Chinese concept stocks may have a chance to rebound in the short term with the help of the peripheral US interest rate cut.

In this scenario, Dolphin has started gradually adding back the positions that were previously cut.

IV. Portfolio Rebalancing and Returns

As the US earnings season comes to an end, triggered by the yen rate hike, the sell-off in US stocks based on valuation has come to an end. Dolphin has slightly increased some of the positions that were cut in July based on the certainty of individual stock performance and upward elasticity.

Based on the performance of the earnings season, the certainty of the performance path, and the valuation price ratio, Dolphin still prioritizes the high-end wafer manufacturing and flash memory tracks in AI. As for NVIDIA, Dolphin is cautious due to its high valuation and high volatility, so Dolphin's approach is more observation-based.

Among the tech giants, Dolphin has cautiously chosen Apple, believing that it has a relatively strong hardware repair certainty and relatively low investment cost in the AI era, with relatively high result certainty.

The first batch of selected stocks and the reasons for increasing positions are as follows:

Last week, the portfolio's return increased by 2.6%, outperforming Chinese asset indices - MSCI China (+1.7%), Hang Seng Tech Index (+0.6%), and Shanghai-Shenzhen 300 Index (+0.4%), but underperforming the S&P 500 (+3.9%).

Since the start of the test to last weekend, the absolute return of the portfolio is 42%, with an excess return compared to MSCI China of 64%. From the perspective of asset net value, Alpha Dolphin's initial virtual assets of $100 million have now risen to $144 million.

V. Individual Stock Profit and Loss Contribution

With the risk of a yen rate hike easing, the thunder of the financial report season ending, and recent CPI and retail sales data, the U.S. economy still appears to be on the path of a soft landing. U.S. stock trading has returned to normal, and with the expectation of a rate cut due to the soft landing + a weaker U.S. dollar, it is still beneficial for companies with a higher proportion of overseas business, with trading once again focusing on tech giants.

For stocks in the Dolphin's pool that experienced large fluctuations last week, the Dolphin explains as follows:

VI. Portfolio Asset Allocation

The Alpha Dolphin virtual portfolio holds a total of 13 individual stocks and equity ETFs, with 5 standard stocks and 8 equity assets underweighted. The rest are distributed in gold, U.S. bonds, and U.S. dollars. As of last weekend, the asset allocation and equity asset weightings of Alpha Dolphin are as follows:

VII. Key Events This Week:

The U.S. earnings season has completely ended, and Chinese concept stocks like Alibaba and Tencent have also released their reports. This week, Chinese assets will enter the moment of truth for industry leaders. Companies like Pinduoduo, Bilibili, and Xiaomi, which have carved out new territories in overseas markets, deserve attention.

Others like Kuaishou, Baidu, Huazhu, and Vipshop, as long as they don't disappoint, should be thankful. In the new energy vehicle industry, companies like XPeng and ZEEKR should be observed mainly to understand the intensity of competition in the second half of the year.

For the focus points on these companies, the Dolphin summarizes as follows:

At that time, the Dolphin will first publish performance quick reads, in-depth analysis, key data breakdown updates on the LongPort platform, as well as meeting summaries. Please have the app ready, set up reminders, and be the first to receive the Dolphin's performance season analysis. Click (here) for the Dolphin Research webpage link. **

Risk Disclosure and Disclaimer of this Article: Dolphin Investment Research Disclaimer and General Disclosure

For recent articles from Dolphin Investment Research's weekly portfolio report, please refer to:

"US Stocks Keep Exploding with 'Ghost Stories', Is There No Bottom Line for the Downfall?"

"Economy and Consumption Are Doing Well, Will the Fed Really Cut Rates in September and Cut Three Times in a Row?"

"Are the 'Brilliant' Small-cap Stocks in the US Nourished by Economic Fundamentals?"

"Soft Landing of US Stocks = Giants in Control + Retail Investors Scattered?" 《The American consumption locomotive is leaking, can it still achieve a soft landing in trading?》

《Deflated social zero, soft landing economy, will it drag down Chinese assets?》

《The U.S. fiscal spending is "not guarding the door", be cautious about trading interest rate cuts》

《U.S. stock market interest rate cut expectations kill "backstabbing", is it reliable this time?》

《Hong Kong stocks suddenly change face, to escape or to accept?》

《The U.S. economy is "financialized", Yellen, Powell become the gatekeepers of the U.S. stock market?》《Simultaneous correction of US concept stocks, who is the opportunity?》

《America in 2024, not a soft landing or no landing》