The logic behind the rise of US stocks is no longer sustainable! Market expectations for the Fed's interest rate cut this year have receded.

The US economy continues to perform better than expected, which has reduced market expectations for a rate cut by the Federal Reserve later this year. According to Tradeweb data, pricing in the derivatives market shows that investors expect the Fed's target rate to be 5% by the end of this year, up from just over 4% in May.

This is also evident from the significant increase in short-term US bond yields. On Monday, the two-year US Treasury yield was 4.4742%, up from around 4.064% at the end of April.

The adjustment of market expectations for a rate cut has shaken the key logic behind the rise of US stocks this year. Some market participants believe that higher rates in the second half of the year may weigh on the US stock market, despite the continued resilience of the economy and corporate profits.

Previously, the market had significantly boosted the US stock market, especially the stocks of large technology companies, as it had expected the Fed to raise rates in May for the "last time" and then cut rates by the end of the year. The NASDAQ Composite Index rose 33% in the past year, with NVIDIA and Apple hitting historic highs. As of Monday, the retreat of market expectations for a rate cut by the Fed this year has not yet been reflected in the stock prices of these large technology companies, which is in sharp contrast to last year when the Fed's rate hikes severely impacted the US stock market.

In fact, although major stock indices have risen, this has only been a feast for a few giants, as most US stocks have actually performed poorly this year. Among the S&P 500 constituents, the number of decliners has exceeded the number of advancers this year. The current NASDAQ 100 index is at a historically high level relative to the Russell 2000 small-cap index, indicating the cautious sentiment of market participants.

Currently, whether it is the latest US economic data, the statements of several senior officials of the Fed, or the articles of the central bank's megaphone "New Fed Communications Agency", all indicate that although the Fed is unlikely to raise rates in June, it may continue to do so later and will not cut rates this year. This all indicates that investors have repeatedly underestimated US economic growth and future interest rate levels.

Data released last week showed strong US employment. Non-farm payrolls increased by 339,000 in May, almost twice the median estimate of 195,000, marking the largest increase since January 2023. Inflation data is also sticky. The US core PCE price index, a key inflation indicator closely watched by the Fed, rose 4.7% YoY in April, higher than the expected and previous value of 4.6%, and rose 0.4% MoM, the fastest pace since January this year.

Although there is a great deal of disagreement among several senior officials of the Fed regarding the next rate hike, they all agree that there is no possibility of a rate cut this year. "New Fed Communications Agency" wrote in an article after the release of the non-farm payrolls report last Friday that May non-farm payrolls cannot resolve internal debates within the Fed, and US interest rates may ultimately be higher than expected.

Media analysis points out that some investors have great confidence in the US economy's ability to avoid a recession, as they believe that there is a lot of positive data indicating that the economy may experience a soft landing. Fixed-income traders continue to buy junk bonds, demanding yields only 4 to 5 percentage points higher than US Treasuries, indicating that they believe the default rate of low-rated companies will remain low. And in past economic downturns, investors often demanded yields on such bonds that were more than 8 percentage points higher than government bonds to compensate for greater risk.