Are the "brilliant" US small-cap stocks more "nourished" than the economic fundamentals?

"Big cuts small and high cuts low," with the chaotic U.S. election, the recent U.S. stock market is rapidly changing. Small-cap stocks have also been fluctuating recently, first surging due to rate cut expectations, then pulling back as Trump expressed that rate cuts are best after November. How long can the small-cap stock market rally last? Are the tech giants out of the game?

For a market like the U.S. stock market dominated by EPS, it is necessary to return to the economic fundamentals. Recently, the release of U.S. retail inventory and social zero data is worth paying attention to:

1. U.S. Consumption: Weakness with Resilience

As mentioned by Dolphin in "Deflating Social Zero, Soft Landing Economy, Will it Drag Down Chinese Assets?", consumer spending continued to weaken in April and May as residents replenished their savings, and social zero in June remained very weak.

Looking at the total social zero, in June, social zero once again tested negative growth, with an overall seasonally adjusted month-on-month growth rate of -0.02%. However, looking closely at the sub-items, the drag was mainly from the single largest item in social zero, accounting for 19% of motorcycle and parts sales, which saw close to a 2% negative growth, as well as gas stations, accounting for 8%, which contracted by nearly 3% month-on-month.

These two factors are due to high interest rates and falling oil prices.

Excluding these factors, the characteristics of commodity consumption presented after removal are actually better than the previous month: apart from automotive retail, the second-largest category (17%) of online retail saw a 2% month-on-month increase.

Among the remaining categories, the third-largest category of food and beverage stores, as well as general merchandise stores, are both showing positive growth, with general merchandise seeing a 0.45% month-on-month increase, which is not low.

Overall, from the changes in consumer categories, it is still very clear that high interest rates have suppressed consumer spending in the U.S.

However, with stable employment and robust household balance sheets, consumption has not collapsed, and overall consumption resilience remains. It's just that structurally, there is a further emergence of essential needs (daily necessities) and cost-effective consumption (further onlineization).

2. U.S. Economy, Still a Relay of Rolling Growth?

Furthermore, looking at the latest social inventory, inventories of various consumer goods in the U.S. are relatively stable. Retailers and wholesalers with slightly lower inventory levels saw month-on-month annualized growth rates of over 8% in May against the backdrop of rising prices, after a long period of hovering around 0%.

At the same time, echoing this, the capacity utilization rate of the US manufacturing sector in May and June continued to rise.

As household consumption gradually weakens structurally but remains stable, the end of destocking in retail + the recovery of manufacturing capacity utilization rate, when these three sets of data are put together, the picture is very clear: as consumption gradually weakens, businesses actively end destocking and slowly start restocking, the growth momentum almost perfectly transitions, while the government is still actively spending money, with a huge deficit, especially if Trump is re-elected, the future does not seem to be a "frugal" government.

In addition, from the outlook of the recent financial reports of several leading companies, 2025 and 2026 seem more like a further landing period for AI semiconductors from cloud to edge, when there will also be a cycle of renewal for edge devices, and technology-driven advancements will enter a new upward cycle, it seems that the US economy is still on a path of a soft landing.

Although the economy is experiencing a soft landing, the trend is still landing. In the process of economic weakening, the hardest hit are still small and medium-sized businesses. The rebound of small-cap stocks at the moment is more due to rate cut expectations, but when the Fed truly starts to enter a rate-cutting cycle, it generally means that the economy is starting to trend downward, which is not favorable for small-cap stocks in terms of direction.

Therefore, the Dolphin believes that the judgment on small-cap stocks still leans towards the stage opportunity of rate cut expectations opening up, but the rate-cutting cycle has not yet started in the middle.

III. Portfolio Rebalancing and Returns

As the Alpha Dolphin portfolio leans more towards the long term, in response to the short-term changes in small caps and the Dow, there has been a significant reduction in holdings of Chinese and American technology stocks, planning to wait for this earnings season based on the performance of large companies, and then increase holdings after a pullback.

At the end of last week, the portfolio's returns declined by 0.9%, outperforming the S&P 500 (-2%), MSCI China (-4.9%), and Hang Seng Tech Index (-6.5%), but falling short of the CSI 300 (+1.9%).

Since the start of the test until last weekend, the absolute return of the portfolio is 37.5%, with an excess return compared to MSCI China of 60%. From the perspective of asset net worth, Dolphin Jun's initial virtual assets of $100 million have now risen to $139 million.

IV. Individual Stock Profit and Loss Contribution

Last week, funds flowed from Nasdaq to small-cap stocks such as the Russell 2000, leading to a general decline in global markets. In this scenario, among the markets Dolphin Jun focuses on, apart from Chinese state-owned concept stocks that may rise due to positive news from meetings, everything else is uniformly declining, with only differences in the magnitude of the decline.

Based on the previous assessment of the adjustment in the U.S. stock market, Dolphin Jun made a unified reduction in positions after weeks of no changes, locking in profits and waiting for opportunities after the U.S. stock market adjustment. The remaining assets after the adjustment are mostly in decline. The specific reasons are analyzed by Dolphin Jun as follows:

V. Portfolio Asset Allocation

The Alpha Dolphin virtual portfolio holds a total of 10 individual stocks and equity ETFs, with 3 core holdings and the rest being underweighted equity assets. The excess equity reduction of 5% has been allocated to gold, with another 5% allocated to U.S. bonds, and the rest in U.S. dollars.

As of last weekend, the asset allocation and equity asset weights of Alpha Dolphin are as follows: