US stocks are expected to continue their upward trend in the second half of the year. However, the pace of growth may not be as strong as in the first half.
High interest rates maintained for a longer period of time increase the downside risks to the US economy, and there may still be pressure on the equity market. The recent correction is mainly due to the suppression of US bond yields, and we need to wait for the Federal Reserve to stop raising interest rates. The US stock market may experience a period of volatile strength in the second half of the year.
According to Guohai Securities, there is still an upward logic for US stocks before an economic recession or a rate cut (which may not necessarily be based on a recession, but may be caused by financial risk events leading to an early rate cut).
However, due to factors such as high valuations of technology stocks, continuous increase in US bond yields in the short term, as well as the risks of gradual weakening of the US economy (affecting the breadth and intensity of future earnings of listed companies and the rebound of non-tech leading stocks) and financial risks such as small and medium-sized banks or commercial real estate defaults in the medium term, the US stock market is likely to have a less favorable performance in the second half of the year compared to the first half, and may be in a state of volatile strength.
If the Federal Reserve stops raising interest rates, it will be beneficial to the US stock market, especially if the expectation of a recession weakens or the timing of a recession is still far away. This is a positive factor for the future of the US stock market. If the confirmation of the Federal Reserve's halt to rate hikes is obtained in September, the United States will enter a period of high interest rates after the rate hikes stop.
During the period of high interest rates after the cessation of rate hikes in the past, when the Federal Reserve's policy interest rates no longer rise and the unemployment rate is low, the market often expects an "economic soft landing" and the US stock market tends to rise. Guohai believes that the current situation of the US economy is similar to the situation during the previous period of high interest rates.
The recent correction in the US stock market is mainly due to a significant increase in the 10-year US Treasury bond yield, reaching a new high since October last year, which has led to a rapid decline in the valuation of the Nasdaq 100 index. Guohai believes that in the short term, US bond yields will still fluctuate at high levels, but if the Federal Reserve stops raising interest rates, medium and long-term US bond yields may decline, reducing the pressure on the stock market.
Whether there will be a rebound in the non-tech leading stocks and the breadth and intensity of such a trend will depend on future earnings expectations, which in turn depend on the resilience of the US economy. Guohai believes that there are no immediate concerns, but long-term concerns cannot be ruled out.
Currently, the US economy remains relatively strong, providing certain support for stock market earnings. Therefore, the earnings expectations for the S&P 500 have been revised upward recently, with significant upward revisions in sectors such as non-core consumer industries, telecommunications services, and energy. However, the longer the period of high interest rates persists, the greater the downside risks to the US economy, and there may still be pressure on the performance of US stocks.
