US stocks are approaching oversold levels in the short term! How much pressure will there be in the future?

Last week, the US Federal Reserve spooked the US stock market. The violent fluctuations in asset prices were caused by a reevaluation of policy paths or a market game regarding the speed and extent of interest rate cuts by the Federal Reserve.

In simple terms, the market wants to know how much interest rate cut expectations are currently priced into the US stock market and what the future holds.

According to analysts Liu Gang, Yang Xuanting, and Li Yujie from Zhongjin Company, "The US stock market implies a net interest rate cut of 5.1 times in the next year, indicating a significant expectation of interest rate cuts." Based on the relationship between the dynamic valuation, dynamic dividend yield of the US stock market, and the nominal US bond interest rate, the current S&P 500 index of 18.25 times dynamic valuation implies a 10-year US bond interest rate of 3.27%, corresponding to a net interest rate cut of 126 basis points in the next year.

Although it has converged compared to the net interest rate cut of 139 basis points priced in before the September interest rate meeting, the extent of interest rate cuts priced into the market is still significant and much higher than the interest rate cuts priced into the current interest rate futures.

In other words, the US stock market has higher expectations of interest rate cuts, relying on lower risk premiums to offset the pressure of higher interest rates, but it will inevitably be affected by rising interest rates.

Considering the worsening liquidity situation in the third and fourth quarters, Zhongjin still does not recommend chasing after high US stocks, but it is also not worried about a deep adjustment unless the interest rate path is completely overturned. This is consistent with Zhongjin's previous view that the US stock market will turn to volatility after the third quarter. The RSI level of the US stock market is also approaching the oversold zone this week.

Looking ahead, the US stock market's "rolling" slowdown will be supported by earnings, while liquidity and valuation may cause disturbances. It is not recommended to chase after high prices, but it is possible to intervene if there is excessive adjustment. In the case of a "rolling" slowdown, the US stock market's earnings are supported, and there is not much risk of a deep adjustment. Therefore, there is no need to worry about the pressure of a deep adjustment similar to the "double kill" by Davis.

However, in terms of valuation, there may be pressure on the US stock market: the valuation is lower than the reasonable level based on growth and liquidity. The current S&P 500's 18.1 times dynamic P/E ratio is equal to the reasonable level supported by the nominal interest rate and the high-yield bond interest rate differential (~18.5 times).

From the perspective of price, interest rates are temporarily maintained at a high level; from the perspective of quantity, the calculation of financial liquidity may bring about a 8% to 10% downward pressure on the US stock market. Therefore, it is not recommended to chase after high prices, and if there is excessive adjustment, it is possible to intervene again.