"Risk Events" Are Everywhere! Fed Decision, Tech Giant Earnings, and Oil Prices Converge This Week, Significantly Heating Up Market Volatility

Stock investors can no longer hope for a leisurely summer. This week, multiple risk events are converging, including the Federal Reserve's interest rate decision, a dense cluster of earnings reports from tech giants, and oil prices breaking through the $100 mark, ushering in a turbulent period for the market.

Microsoft and Meta will report earnings first on Wednesday, with Apple and Amazon following closely on Thursday. Meanwhile, the Federal Reserve and the Bank of England will announce their interest rate decisions in succession, while European inflation data and China's PMI figures will also be released in quick succession. Richard Privorotsky, a partner at Goldman Sachs Group, pointed out that all of this is occurring against the backdrop of Brent crude briefly breaking above $100 per barrel, high global bond yields, and a two-week consecutive decline in stock markets.

In terms of market pricing, the swap market has fully priced in expectations for a September interest rate hike by the Federal Reserve and implies the possibility of another hike within the year. J.P. Morgan's market intelligence division warns that if the 10-Year Treasury Yield breaks further above 4.8%, interest-rate-sensitive stocks will face greater pressure.

Volatility Heats Up, Systematic Investor Positions Remain Fragile

Geopolitical tensions have already pre-heated volatility, and this week's earnings reports and economic data have the potential to trigger even larger market swings.

Historically, Goldman Sachs data shows that in U.S. midterm election years, index-level volatility typically begins to climb in August and continues to rise until October. Richard Privorotsky believes that VIX call options are currently good hedging tools for tail risks, stating that the market is more likely to maintain a volatile pattern—implied correlation remains near its lowest level in decades, with dispersion suppressing overall market volatility.

Technical aspects are also worth noting. The MSCI World Index encountered significant resistance near the 4,885 point level. Deutsche Bank strategists, including Parag Thatte, pointed out that systematic investor positions are at the 70th percentile, a relatively high level. Once volatility rises or the stock market breaks downward out of its range, these positions will face considerable fragility.

Furthermore, active investors already showed clear deleveraging last week, with their risk exposure falling to the 17th percentile, near the low seen in early April, far below the reasonable level implied by earnings and macroeconomic growth.

"Magnificent Seven" Valuations Fall to Historical Lows, Divergence Intensifies

Earnings reports from tech giants are the focal point of the market this week. The "Magnificent Seven" tech stocks have been the source of funding for AI beneficiary stocks and semiconductor trades for months, but the seven giants themselves did not benefit from the recent wave of profit-taking in related sectors. According to Deutsche Bank strategists, position adjustments for large-cap tech stocks are about three-quarters complete, with previous high levels significantly reduced.

However, notable signals have emerged on the valuation front. The forward P/E ratios of the Magnificent Seven have fallen to the bottom of their seven-year range, both in absolute and relative terms. Deutsche Bank believes that this valuation compression is primarily driven by falling stock prices rather than downward revisions to earnings expectations, which may provide opportunities for buying on dips.

Concerns about AI capital expenditure continue to ferment, with Alphabet's announcement last week further reinforcing these worries, suppressing investors' willingness to re-enter the market. However, Morgan Stanley analysts Stephen Byrd and Michelle Weaver hold a different view. They remain optimistic about the "Intelligent Superhighway" theme, recommending holdings in fuel cell and energy storage companies, enterprises in the computing power manufacturing ecosystem, and hyperscale cloud providers with scale benefits and the ability to deliver returns on AI capital expenditure, specifically naming Meta, Alphabet, Microsoft, and Amazon.

"Given that the recent market correction has affected a range of AI infrastructure stocks, we believe the current timing represents a rare and attractive buying opportunity," the Morgan Stanley team wrote. "We are fundamentally bullish on the speed of AI capability enhancement, the revenue generated by AI applications, and the associated capital expenditure."

Fed Stance Becomes Key Variable, Bond Yields Tug at Stock Market Nerves

Aside from tech earnings, central bank actions pose the greatest threat to market calm this week. The swap market has fully priced in a September interest rate hike by the Federal Reserve and implies the possibility of a second hike within the year. Any remarks by Federal Reserve Chair Kevin Warsh will be closely scrutinized by the market.

Warsh holds reservations about forward guidance, meaning that interest rate hike expectations will rely more heavily on data. If tensions in the Middle East ease further and oil prices fall accordingly, it will help central banks accomplish their policy tasks.

J.P. Morgan's market intelligence division emphasizes that for the stock market, the speed of interest rate changes is more critical than the absolute level. The institution noted that the 10-Year Treasury Yield broke above the May high of 4.67% last week, with the next key observation level being the January 2025 high of 4.79%. "If subsequent data or Federal Reserve wording supports yields rising further above 4.8%, interest-rate-sensitive stocks will begin to face greater pressure."