Why is there still room for growth in the short term for US stocks?

The dawn of the US debt ceiling crisis, what impact will it have on the US stock market?

Huaxin Securities sees that from the risk side, the current market risk factors are gradually calming down:

On the one hand, the aftermath of the US bank incident is gradually subsiding. With the US debt ceiling and bank turmoil approaching the end, regional bank ETFs have stopped falling, and interbank deposit outflows have slowed down. Subsequent bank risks will be more concentrated on small banks with around $1 billion in assets, and large banks like First Republic Bank have lower risks.

With the two parties reaching a relatively consistent agreement on the debt ceiling, the hedging operation against US bond defaults is also coming to an end. Subsequently, we need to be more vigilant about the liquidity vacuum cleaner effect brought about by government bond issuance.

However, at present, unlike in 2019, the overnight market in the United States has a large amount of assets, and money market funds have more than $2 trillion in funds left in the ONM RRP market, which is enough to absorb the scale of new government bond issuance. As usual, the US Treasury Department itself will communicate with major institutions before issuing bonds, and try to avoid disturbances in liquidity.

Therefore, the current market's liquidity impact is relatively small.

Under the relatively limited risks, the market will pay more attention to data that can reflect the actual economic operation. This is also why, under the relatively intensive release of economic data this week, the market is expected to see a relatively large reversal.

Looking ahead, it is expected that the US economy will continue to decline, and the Fed will not raise interest rates again. The macro theme with a small probability of interest rate cuts in 2023.

For the stock market, there is still room for upward movement in the short term.

US stocks often perform well during the period of high interest rates, because the macroeconomic environment is often good during the period of high interest rates, which also conforms to the current economic situation in the United States. With the end of the first quarter report and the easing of the impact of the US debt ceiling and regional bank risks, it is expected that the market's excessively hawkish interest rate expectations for June will be reversed to a certain extent in the future, bringing about an overall improvement in market expectations and continuing to push US stocks upward.

US stocks have returned to the stage of "bad news is good news for the market", and with the successive release of various economic data, the signal of the weakening of the resilience of the US economy will become more and more obvious, pushing the market to lower its expectations for interest rate hikes.

In addition to the continuous revision of expectations, the Fed's interest rate meeting in June will also further announce the latest prediction of the Fed on the overall economy, further anchoring the overall expectation standard line. It is expected that the Fed's economic forecast for June is still not enough to reach the angle of interest rate cuts (the unemployment rate touches 5% upwards, and inflation touches 3% downwards), but there will still be a certain degree of weakening, which also supports the macro theme of the economy entering a shallow recession and promotes the correction of US stock interest rate expectations.