Earnings season is not about numbers! The tug-of-war in U.S. stocks at high levels: Where is the next fuse for the bull market?
Bullish U.S. stock investors have clung to the "Goldilocks" fantasy of perfection, pushing the market's risk appetite to the extreme. So much so that it’s hard to figure out now: What else can we rely on to ignite the fuse that will push up the market in the next round? Although this week's lower-than-expected U.S. inflation data gave the market a shot in the arm, the effect is fleeting. U.S. stocks are now struggling to reach new highs at historically high levels. At the same time, the 10-year U.S. Treasury yield remains stubbornly close to 4.6%, and the U.S. dollar index remains at a level not far from its May 2025 high.
Bullish U.S. stock investors have clung to the "Goldilocks" fantasy of perfection, pushing the market's risk appetite to the extreme. So much so that it’s hard to figure out now: What else can we rely on to ignite the fuse that will push up the market in the next round? Although this week's lower-than-expected U.S. inflation data gave the market a shot in the arm, the effect is fleeting. U.S. stocks are now struggling to reach new highs at historically high levels. At the same time, the 10-year U.S. Treasury yield remains stubbornly close to 4.6%, and the U.S. dollar index remains at a level not far from its May 2025 high. Despite the overall positive start to this earnings season, these tight macro conditions are still like a curse, tightly suppressing the bulls. Richard Privorotsky, a partner at Goldman Sachs Group, pointed out, "Whether U.S. stocks can continue to rise, the next core will depend on the performance guidance given by companies and the structure of market positions, rather than the news headlines themselves. Energy is still a key macro risk, but the current inflation situation is improving." Privorotsky believes that there is a high probability that this financial reporting season will deliver a good answer. Major banks have easily passed the performance test before, and ASML's financial report also confirmed that the capital expenditure demand in the semiconductor industry is still strong. "Similar to the situation faced by most AI concept stocks, the core issue now is no longer whether the financial report numbers are good or not, but whether these numbers are stunning enough to deserve today's high positions." Privorotsky pointed out. Systemic strategic positions approach historical limits In a sense, the hidden dangers behind the market carnival are indeed quietly piling up. Bank of America's fund manager survey released this week showed professional investors' cash levels have now fallen to extremely low levels, while the bank's "long-short indicator" is sending warning signals. In addition, according to data from Deutsche Bank, the chips of systematic strategies have already been filled up, leaving limited room for incremental buying to continue to increase positions. Trend-following CTA funds have pushed stock holdings into the upper half of the historical range and are currently in the 72nd percentile. Among volatility control funds, this ratio is extremely high, ranking at the 91st percentile. This extreme phenomenon of "running out of ammunition" - high position levels - is also reflected in the flow of funds. Société Générale Arthur van Slooten and his team pointed out that although the absolute volume of funds flowing into bond and money market funds has exceeded that of equity funds this year, both are nowhere near the surge in assets under management of the latter. In the $72.9 trillion fund market tracked by EPFR Global, excluding commodities, stock funds now account for a record 64.7% of total assets. "In other words, fund investor risk appetite has reached an all-time high," they wrote. The market environment remains optimistic Of course, this bullish stance seems justified against the backdrop of lower inflation and strong economic and earnings growth. With U.S. CPI and PPI data released this week showing that price pressures have eased, the Fed may take a more dovish stance in the coming weeks. “For market bulls, this is even better than Goldilocks could have imagined,” said JPMorgan Market Intelligence, led by Andrew Tyler. They said the inflation data should dispel any worries about a rate hike in July and could ease worries about a hike in September. “This sets the stage for the market to move higher and extend its gains in the process.” For now, the J.P. Morgan team continues to favor a 'dumbbell' strategy consisting of technology stocks and cyclical stocks, and recommends healthcare stocks as an uncorrelated allocation to hedge risk. Within the technology sector, they believe that the consensus of "long semiconductors and short the 'Big Seven' or software stocks" may change, and given the low valuations of the "Big Seven", buying may return to the sector. However, they cautioned that investors may first need to see an increase in end-user AI adoption or an acceleration in corporate earnings growth, allowing the company to reduce its reliance on credit markets in the future.
In the meantime, the next leg up could still hinge on momentum trading. Although the position allocation in this field has been purged to a certain extent after experiencing a tragic plunge, the overall position level of investors remains high. While some sector rotation may help sustain gains, more momentum may be needed to push the benchmark index further higher, given how much momentum trading has played in driving the market higher over the past year. "The market's leading sectors have been put to the test over the past three weeks, with the momentum factor experiencing its sharpest sell-off since the early 2000s," said a team of Goldman Sachs strategists led by Andrea Ferrario. “Momentum trading continues to dominate equity markets, although oil prices have also re-emerged as an important driver of cross-asset returns.” (
In the meantime, the next leg up could still hinge on momentum trading. Although the position allocation in this field has been purged to a certain extent after experiencing a tragic plunge, the overall position level of investors remains high. While some sector rotation may help sustain gains, more momentum may be needed to push the benchmark index further higher, given how much momentum trading has played in driving the market higher over the past year. "The market's leading sectors have been put to the test over the past three weeks, with the momentum factor experiencing its sharpest sell-off since the early 2000s," said a team of Goldman Sachs strategists led by Andrea Ferrario. “Momentum trading continues to dominate equity markets, although oil prices have also re-emerged as an important driver of cross-asset returns.” (