After enduring the shock from the "Trump 2.0 trade," the U.S. stock market has fallen for two consecutive weeks, with technology stocks being the hardest hit, and the highly representative Nasdaq 100 Index has corrected by 6.54% over the two weeks. Fortunately, on the last trading day of the past week (July 26), the U.S. stock market showed a slight recovery from its weakness.
The technology stocks in the Asia-Pacific market were also impacted, with TSMC plunging more than 5% on the 26th alone. For the week ending on the 26th, the MSCI Asia Pacific Index excluding Japan (MXAPJ) fell by 1.9%, dragged down by the stock markets of Taiwan, South Korea, and China's A-shares and Hong Kong stocks (which fell by 2% to 4%), while the stock markets of India (up 2%) and Indonesia (up 0.3%) outperformed the broader market. The plunge in U.S. technology stocks led to a deep correction in Taiwan's technology semiconductor industry chain, and foreign capital continued to net sell Taiwan's stock market (-$2.1 billion), China's A-shares (Northbound -$1.6 billion), and South Korea's stock market (-$700 million). So far in July, the net outflow of Northbound capital has been 28.78 billion yuan.
Huang Senwei, a senior market strategist at AllianceBernstein, a U.S. asset management giant, told Yicai reporters that the average expansion time of the U.S. economic cycle is about 64 months, so a recession is unlikely to occur in 2024. Driven by capital reshuffling, the rotation from large-cap to small- and mid-cap stocks in the U.S. stock market may continue, but based on the still resilient macro data such as consumption and employment, the likelihood of the U.S. stock market experiencing a more than 20% pullback is relatively low. Despite the recent continuous outflow of Northbound capital, A-shares are still undervalued and may benefit from the push of the U.S. interest rate cut cycle starting in September. International institutions continue to be optimistic about the manufacturing export theme and companies willing to increase dividends or repurchase stock strength.
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The probability of a significant correction in the U.S. stock market is not high. The concentration risk of U.S. stocks has been mentioned repeatedly, especially the "Magnificent 7" in the technology sector, which has been performing strongly over the past year. However, when crowded positions begin to loosen, the market is inevitably impacted. With the start of the "Trump 2.0 trade," the U.S. presidential candidate's previous remarks on the chip industry and geopolitics directly led to TSMC's stock price plummeting by 8% on July 17. What the market is more concerned about is that protectionist policies may bring a more lasting impact on large technology companies.
The epic rotation continues. Small-cap stocks, which have been sluggish for nearly three years, have begun to show signs of life. The Russell 2000 Index has outperformed the S&P 500 Index for two consecutive weeks, with a gain of 1.67% in the past week, and a 9% increase in the earlier week, while the S&P 500 Index fell by 1%, and the gap between the two reached an unprecedented 10 percentage points in 40 years. Compared to large-cap stocks, small-cap stocks focus on the domestic U.S. economy, benefit from the expectations of interest rate cuts and other positives, and are less susceptible to tariff impacts.
Fortunately, on the last trading day of the past week (July 26), large-cap stocks recovered from their weakness, with the S&P 500 Index closing up 1.11% at 5,459.1 points, and the Nasdaq 100 Index rising by 1.03%, to 19,023.66 points.
Analysts generally told reporters that the poor financial performance of U.S. star technology stocks has laid the groundwork for the stock price plunge. On July 24, after Tesla announced its financial results after the market closed, its stock price fell by 8%. The company's second-quarter revenue of $25.5 billion was higher than expected, but automotive revenue fell by 7% year-over-year, and earnings per share were $0.52, which was less than the expected $0.61. Affected by price reductions and increased costs (AI projects and humanoid robots, etc.), the automotive business gross margin fell to 14.6% after excluding the sale of carbon emission credit quotas. The company's CEO, Musk, confirmed that the launch of the robot taxi, Robotaxi, has been postponed to October.
Google (Alphabet) reported better-than-expected revenue and profits for the second quarter, but the growth rate of its advertising business slowed down, and YouTube's advertising revenue was less than expected, causing the stock price to fall by more than 2% after the market closed.
However, the consensus is that the U.S. stock market is merely correcting, and the probability of entering a technical bear market is currently very small. Huang Senwei told reporters that the current proportion of the technology sector in the U.S. stock market is significantly higher than it was 25 years ago, which makes the stock market more resilient and less affected by macroeconomic fluctuations. At the same time, the technology sector, such as the information technology and communication services industries, is expected to see an earnings per share growth of about 21% in 2024, which has raised the overall earnings expectations of the S&P 500 Index.He also believes that although the concentration of the top seven US companies is relatively high, these companies do not have high price-to-earnings ratios, and their profitability and fundamental conditions are sound, which is different from the situation during historical bubble periods. In addition, the Federal Reserve's interest rate cut expectations may alleviate the pressure on small-cap stocks, as they are more affected by floating interest rates. Currently, US inflation is between 2% and 4%, and the actual stock market return rate is about 8.1%. With inflation under control, there is still room for growth in the US stock market.
Coincidentally, Matt Weller, Global Head of Research at Gain Capital Group, told reporters that for the Nasdaq 100 Index, 20,000 points is a key level. If the upcoming earnings reports can meet or exceed expectations, this technology stock-intensive index may return to the 20,000-point mark and may test the record high of nearly 20,700 points in a short period of time. However, if the earnings reports are weak and the index fails to return to the 20,000-point mark, it may lead to the index testing the 18,900 and 18,400 points.
At the end of July, the Federal Reserve is about to hold an interest rate meeting, and Fed Chairman Powell's evaluation of the economy will drive the market. Currently, the market expects a higher probability of a rate cut in September, and there may be another rate cut in December. The latest US core personal consumption expenditure (PCE) annual rate was 2.6%, higher than the expected 2.5%. The GDP data released in the same week showed that the US GDP grew by 2.8% in the second quarter, which also led to the expectation of an early rate cut in July basically dissipating.
Northbound capital outflows but sentiment may have bottomed out.
Affected by external uncertainties, the Asia-Pacific market has recently come under pressure.
In the week ending July 26, the MXAPJ fell by 1.9%, with utilities, healthcare, and software sectors outperforming the previously high-flying hardware and semiconductor sectors. Foreign capital continued to net sell Taiwan's stock market (-$2.1 billion), and TSMC plummeted on the 26th.
Northbound capital also showed a net outflow in July. In fact, against the backdrop of the A-share market's decline, northbound capital began to flow out in the second quarter. At the sector level, northbound capital increased its holdings in banking, materials, technology hardware, and utilities, and reduced its holdings in food and beverages, software, durable consumer goods, and automobiles, generally showing a preference for defensive sectors.
Zhu Liang, Deputy General Manager and Investment Director of Allianz Fund, recently told reporters from First Financial Daily: "In the current low market sentiment, we have done a retrospective - in the past 10 years, when the Allianz A-share market sentiment index has fallen below 10 degrees, the performance of the CSI 800 Index in the next 3 months, 6 months, and 12 months has reached 4.3%, 5.9%, and 10.5% respectively. When market sentiment bottoms out, the future performance of the A-share market is expected to be promising."
He said that he still favors the manufacturing export theme. "China's export data still has resilience. In Japan's post-real estate cycle, the best-performing industries are also export-oriented industries, such as medical, automotive and parts, high-tech, apparel, etc. This is a good reference for the Chinese market." He said that for the Apple industry chain, many companies have moved their production bases to Southeast Asia due to labor, tariffs, and other factors, but these companies' profits will be brought back to the country, so for investors, investing in stocks can still make a profit.
In addition, the policy of increasing dividends is also a trend that foreign capital is paying attention to. South Korea's recently introduced market value management policy requires listed companies to forcibly cancel repurchased treasury shares or distribute them through employee or executive incentive mechanisms.In terms of domestic capital, the direction of portfolio adjustment is similar to that of Northbound capital. The top three sectors in which public mutual funds increased their positions in the second quarter are electronics, communications, and public utilities, with respective increases of 2.5, 0.9, and 0.8 percentage points compared to the previous quarter. The electronics sector, which was reduced by public mutual funds in the first quarter, benefited from policy support and its own high growth prospects, leading the increase in positions in the second quarter. Defensive sectors such as public utilities and banks received additional investments from public mutual funds amid weak market sentiment. The food and beverage sector saw a reduction of 3.1 percentage points in positions by public mutual funds in the second quarter due to the slow recovery in consumer spending.
It is worth mentioning that the previously sought-after high dividend sector has entered a correction phase, which has also raised market concerns. Meng Lei, China Equity Strategy Analyst at UBS Securities, told reporters that the main holders of high dividend stocks are insurance asset management and ETFs, but the overall positions of public mutual funds are still at a low level and not crowded.
"Although the coal and banking sectors have received additional investments from public mutual funds in the past few quarters, they are still under-allocated, with banks being the most under-allocated sector. We believe that long-term investors, including insurance capital, will continue to net inflow into dividend strategies, and short-term investors will also continue to increase positions in related sectors and individual stocks in the second half of the year to enhance the defensiveness of their portfolios," he said.
UBS believes that the overall downside risk in the current A-share market is controllable, and the previously pessimistic market sentiment may lay the foundation for an uptrend in A-shares. It is expected that as A-share earnings slightly rebound in the second quarter, the effects of real estate easing policies may have begun to be released, coupled with the high probability of the Federal Reserve starting to cut interest rates in the fourth quarter, concerns about macroeconomic prospects may be somewhat alleviated, thereby driving a gradual return of Northbound capital.
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