Market Theme Review

Macroeconomic Background is Improving

Recently, the macroeconomic environment has shown a favorable trend for risk assets:

• Inflation cools across the board, with the U.S. June CPI showing a month-on-month decline for the first time in four years, and the core year-on-year growth rate hitting a new low in over three years.
• The job market has slightly softened, but overall it remains balanced and stable.
• The economic surprise index is at a low, indicating that economic data is below expectations.
• The Financial Conditions Index shows a continued easing trend.

These factors are favorable for the performance of risk assets, as investors anticipate the Federal Reserve to take action to support economic expansion. Over time, concerns about inflation at the end of the first quarter have proven to be excessive. In the absence of a recession, a weakening dollar and the Federal Reserve beginning to cut interest rates could benefit emerging markets and cryptocurrencies.

The pressure of the second quarter financial report season is relatively high

The current market focus is on the earnings season that has just begun. Market expectations are very optimistic, but there may be difficulties in achieving the previous level of surprises. We might see some profit-taking or sector rotation.

Wall Street expects the S&P 500's second-quarter earnings to grow by 8.9% year-on-year, up from 5.9% in the previous quarter. This expectation has been revised down from an original forecast of 9.1%.

From the market response in the first quarter, the price increase of companies that performed better than expected is not as pronounced as the decline of companies that performed worse than expected. The market reaction to the earnings of major financial stocks that have been released is worse than in the first quarter.

As the major tech stocks emerge from the performance low of 2022, the likelihood of other companies maintaining strength after their earnings reports, besides Nvidia or Tesla, is decreasing. There may be a rotation from "Mag7" to the other 493 stocks, or a shift from AI to other hotspots such as humanoid robots and autonomous driving.

Boeing Company Pleads Guilty

Boeing has agreed to plead guilty in connection with two 737 Max aircraft disasters and will face fines of up to $487.2 million. The company admitted to deliberately concealing safety risks during the certification application process. This indicates that Boeing's negative news has been fully accounted for, which is a positive development for its valuation recovery. This situation is similar to Binance's guilty plea and fines in November 2023, after which the price of BNB rose significantly.

Market expectations for the Republican victory in the November election

The derivatives market is pessimistic about Biden's chances of reelection, while the probability of Trump winning has increased from 40%-50% at the beginning of the year to about 60%. The probability of the Republican Party winning both the House and Senate as well as the presidency has also increased, currently at about 50%.

Investor focus is shifting from growth and monetary policy to politics. Attention is on the tariffs, tax policies, and regulatory changes that Trump may implement. After Trump takes office, tariffs are expected to increase, which could benefit domestic market companies but may slightly drag down GDP growth and push up inflation.

The Republican Party's significant victory may lead to an extension of tax reduction policies and an increase in fiscal spending, which would be beneficial for the stock market. However, investment in commercial equipment has stagnated, and companies may delay projects due to concerns about changes in government policies.

China Exports Deflationary Pressure

China is currently in a deflationary state and, as the world's largest exporter of goods, is exporting deflationary pressure. This helps to lower core inflation rates in Europe and the United States, possibly providing more room for interest rate cuts by central banks in these regions this year, which would be beneficial for the stock market and cryptocurrencies.

China holds a significant market share in multiple key export products, maintaining an advantage not only in traditional manufacturing but also occupying an important position in high-tech fields such as lithium batteries and photosensitive semiconductors.

China's investment-driven economic model has led to overcapacity, particularly in capital-intensive industries such as steel, coal, chemicals, and real estate. This inefficient allocation of resources will hinder long-term economic growth potential.

Bitcoin underperforms

Since the beginning of the year, Bitcoin's risk-return ratio has been significantly lower than that of U.S. stocks, which is uncommon historically. This is mainly due to a surprising sharp decline in the recent month; prior to that, Bitcoin's year-to-date Sharpe ratio was higher than that of the S&P 500 index.

Continuous Development of RWA Tokenization

BlackRock's BUIDL has launched for less than four months and currently holds tokenized government bonds worth over $500 million. MakerDAO plans to invest $1 billion of its reserves in tokenized U.S. Treasury products. This means that the scale of tokenized U.S. Treasury RWA will grow by 55%, potentially bringing MakerDAO an additional income of $40-50 million per year.