Taking stock of the three swords hanging over U.S. stocks: inflation, leverage, and chip bubbles
The recently released U.S. economic indicators are quite contradictory, and coupled with the valuation differences in the chip industry, it is difficult for investors to make a judgment. A report from the U.S. Department of Labor showed that inflationary pressures were easing, but retail sales reported by the Commerce Department fell sharply. Despite the support from the good news about inflation, the US stock index fluctuated downward last week, and chip stocks generally weakened.
The recently released U.S. economic indicators are quite contradictory, and coupled with the valuation differences in the chip industry, it is difficult for investors to make a judgment. A report from the U.S. Department of Labor showed that inflationary pressures were easing, but retail sales reported by the Commerce Department fell sharply. Despite the support from the good news about inflation, the US stock index fluctuated downward last week, and chip stocks generally weakened. Last week, the Dow Jones 30 Industrial Stock Average, which is dominated by blue-chip stocks, fell 0.93%, the S&P 500 Index fell 1.55%, the Nasdaq Index, which is dominated by technology stocks, fell 2.90%, and the Philadelphia Semiconductor Index (SOX, Philadelphia Semiconductor Index) fell 9.97%. In other markets, U.S. Treasury yields fell from 4.56% to 4.545%, with little change; London spot gold fell 2.51%; West Texas crude oil futures for August rose 15.49%; U.S. dollar index September futures fell slightly by 0.17%; Bitcoin spot fell 0.3%. Inflation pressure eases, but outlook is not optimistic Judging from the price index report released by the U.S. Department of Labor, compared with May, the consumer price index (CPI) and producer price index (PPI, wholesale price index) in June fell sharply. The overall and core inflation rates of the consumer price index in June were 3.5% and 2.6% respectively, down from 4.2% and 2.9% last month. The overall inflation rate based on the producer price index was 5.5%, down from 6% last month, but the core inflation rate was 4.7%, slightly higher than last month's 4.6%. As shown in Table 1, compared with the same period last year, the consumer price energy index increased by 15.7%, the service price index increased by 3.2%, and food prices increased by 3.0%. Compared with May, the consumer price index fell by 0.4% month-on-month in June. Among them, energy prices fell by 5.7%, which made the greatest contribution to alleviating price pressure. Although the price of commercial services increased by 0.4%, food prices fell by 0.6% and energy prices fell by 6.4%, pulling down the producer price index. Energy prices are the biggest variable affecting U.S. inflation, while prices for other consumer items are either high or leveling off. Thanks to the US-Iran armistice agreement, crude oil prices fell sharply, and inflation also fell in June. Recently, the U.S. government has blatantly violated the agreement and bombed Iranian facilities again. Iran has resolutely fought back, and shipping in the Strait of Hormuz has once again been under control. To untie the bell, one must tie the bell. How the US government solves the problem is a very difficult problem. If the navigation problem in the Strait of Hormuz is not completely resolved, price levels are bound to rebound in July. Therefore, investors must re-evaluate the security of the energy supply chain. U.S. stock financing levels rise sharply and risk factors accumulate The stickiness of inflation makes the Federal Reserve afraid to cut interest rates lightly. On the contrary, many officials advocate raising interest rates. Compared with the end of the last Fed meeting (June 17), on July 17, the yields on 1-month, 3-month, 2-year, and 5-year Treasury bonds were 3.707% (the closing price on June 17 was 3.644%, the same below) and 3.80 respectively. 3% (3.751%), 4.172% (4.163%), 4.273% (4.229%), while the 10-year and 30-year bonds are 4.545% (4.463%) and 5.064% (4.927%) respectively. U.S. Treasury bond yields rose across all maturities, especially the 10-year and 30-year yields. Rising interest rates have led to higher borrowing costs for the U.S. government, businesses and individuals. According to the U.S. Treasury Department’s announcement, the total debt of the federal government has reached 39.48 trillion U.S. dollars (July 15), and interest expenses have exceeded 1 trillion U.S. dollars. Rising interest rates have further increased financial burdens. Therefore, the Trump administration is eager for the Federal Reserve to cut interest rates; companies must fully consider financing costs and weigh the pros and cons of stock financing and bond financing; individuals continue to bear higher interest costs and have to cut other expenses.
Enthusiasm for AI is heating up, spurring investment in ultra-large data centers, and technology giants have plans to expand capital expenditures. In terms of stock financing, US corporate IPO (initial public offering) financing amounted to US$53.9 billion in the first quarter of this year, which surged to US$191.1 billion in the second quarter (including US$75 billion from the space exploration technology company SpaceX). In terms of bond financing, in the first quarter of this year, the US government and corporate debt issuance was US$3.24 trillion, and in the second quarter it was US$3.18 trillion, a decrease of approximately US$55.9 billion. Obviously, high interest rates have inhibited the urge of governments and companies to issue bonds, and companies have turned to the stock issuance market. Rising interest rates also increase the cost of stock financing for investors. If the stock market continues to rise and the capital gains it brings are higher than the financing costs, then investors are willing to use their stock or bond assets as collateral to raise funds from brokers, which will further push up the stock index or maintain the status quo of the index, and vice versa. Most investors will experience the investment psychological cycle of optimism → extreme greed → extreme panic → optimism. According to relevant analysis, investors in the U.S. market are currently in a state of extreme greed. As shown in the figure, U.S. investors’ quarterly equity financing reached $188.73 billion, the largest amount during the period, indicating that investors are overconfident (in a state of extreme greed), similar to the situation before the stock market crashes in 2000 and 2008. According to relevant reports, the current balance of U.S. stock financing has reached a record high of 1.4 trillion U.S. dollars, which means that once the market continues to decline, market volatility will increase, and investors will be eager to deleverage, leading to expanded investment losses and tight market liquidity. According to media reports, in the past week, investors sold a net US$4.8 billion in stocks, of which growth stocks sold a net US$7.18 billion, while net purchases of technology stocks were US$1.57 billion, a new low in three weeks. Chip stock valuations are increasingly questioned by investors Investors' enthusiasm for AI investment has begun to cool down, and their confidence has become more shaken. Major events related to this include: SpaceX's stock price has been falling since its listing, and space data centers are like castles in the air; Meta (formerly Facebook) announced the sale of its excess computing power, indirectly denying the market narrative that computing power is in short supply; due to weakness in software sales and infrastructure business, IBM's stock recorded its largest single-day decline since October 19, 1987. The profitability of investment in ultra-large data centers has been questioned, and chip stocks (computing power and algorithm support) are the first to bear the brunt. As shown in Table 2, in the first 12 trading days of July, the S&P chip stock index fell 18.83%; the Philadelphia Semiconductor Index (SOX) fell 18.06%. The stock prices of technology giants have been relatively stable, but most chip stocks have fallen sharply. As far as technology heavyweights are concerned, in the first 12 trading days of July this year, the stock prices of Nvidia, Microsoft, Google, Apple, Amazon, Meta, and Tesla increased or decreased by 2.8% respectively (up 8.75% this year, the same below), 6. 1% (-18.57%), -2% (10.79%), 18.7% (22.76%), 4.2% (7.11%), 15.2% (-2.13%), -15.32% (-6.2%). Except for Google and Tesla, the remaining five stocks bucked the trend and rose, indicating that investors began to choose technology blue chip stocks. More and more investors are worried that chip companies are overvalued and are beginning to reduce their positions. In the first 12 trading days of this month, Intel, Micron, Applied Materials, Lam, Kelei, Western Digital, and GlobalFoundries fell by more than 20%; Marvell and SanDisk fell by more than 30%; Broadcom and Qualcomm fell by smaller amounts. Since the beginning of this year, Applied Materials, Marvell, AMD, Intel, Western Digital, Seagate, Micron, and SanDisk have increased by 106.30%, 122.03%, 131.49%, 157.56%, 177.02%, 186.02%, 197.45%, and 470.74% respectively. The current correction is reasonable.
The trend of U.S. inflation determines the policy direction of the Federal Reserve, and the resumption of war in the Middle East has led to rising oil prices, which has also made the Federal Reserve's decision-making more difficult. Uncertainty in monetary policy has become one of the important factors leading to financial market instability. In view of the current deterioration of the international political environment, the Federal Reserve is expected to maintain interest rate policy unchanged on July 29. Investors are becoming more risk averse. If the stock market continues to fall, investor losses will increase and market liquidity will become tight. Increased liquidity risk is another important factor in the instability of the financial market. As mentioned before, chip stocks have generally experienced astonishing gains this year, and chip stocks are overvalued. How will the market bubble burst? This is another question that worries investors the most.
Enthusiasm for AI is heating up, spurring investment in ultra-large data centers, and technology giants have plans to expand capital expenditures. In terms of stock financing, US corporate IPO (initial public offering) financing amounted to US$53.9 billion in the first quarter of this year, which surged to US$191.1 billion in the second quarter (including US$75 billion from the space exploration technology company SpaceX). In terms of bond financing, in the first quarter of this year, the US government and corporate debt issuance was US$3.24 trillion, and in the second quarter it was US$3.18 trillion, a decrease of approximately US$55.9 billion. Obviously, high interest rates have inhibited the urge of governments and companies to issue bonds, and companies have turned to the stock issuance market. Rising interest rates also increase the cost of stock financing for investors. If the stock market continues to rise and the capital gains it brings are higher than the financing costs, then investors are willing to use their stock or bond assets as collateral to raise funds from brokers, which will further push up the stock index or maintain the status quo of the index, and vice versa. Most investors will experience the investment psychological cycle of optimism → extreme greed → extreme panic → optimism. According to relevant analysis, investors in the U.S. market are currently in a state of extreme greed. As shown in the figure, U.S. investors’ quarterly equity financing reached $188.73 billion, the largest amount during the period, indicating that investors are overconfident (in a state of extreme greed), similar to the situation before the stock market crashes in 2000 and 2008. According to relevant reports, the current balance of U.S. stock financing has reached a record high of 1.4 trillion U.S. dollars, which means that once the market continues to decline, market volatility will increase, and investors will be eager to deleverage, leading to expanded investment losses and tight market liquidity. According to media reports, in the past week, investors sold a net US$4.8 billion in stocks, of which growth stocks sold a net US$7.18 billion, while net purchases of technology stocks were US$1.57 billion, a new low in three weeks. Chip stock valuations are increasingly questioned by investors Investors' enthusiasm for AI investment has begun to cool down, and their confidence has become more shaken. Major events related to this include: SpaceX's stock price has been falling since its listing, and space data centers are like castles in the air; Meta (formerly Facebook) announced the sale of its excess computing power, indirectly denying the market narrative that computing power is in short supply; due to weakness in software sales and infrastructure business, IBM's stock recorded its largest single-day decline since October 19, 1987. The profitability of investment in ultra-large data centers has been questioned, and chip stocks (computing power and algorithm support) are the first to bear the brunt. As shown in Table 2, in the first 12 trading days of July, the S&P chip stock index fell 18.83%; the Philadelphia Semiconductor Index (SOX) fell 18.06%. The stock prices of technology giants have been relatively stable, but most chip stocks have fallen sharply. As far as technology heavyweights are concerned, in the first 12 trading days of July this year, the stock prices of Nvidia, Microsoft, Google, Apple, Amazon, Meta, and Tesla increased or decreased by 2.8% respectively (up 8.75% this year, the same below), 6. 1% (-18.57%), -2% (10.79%), 18.7% (22.76%), 4.2% (7.11%), 15.2% (-2.13%), -15.32% (-6.2%). Except for Google and Tesla, the remaining five stocks bucked the trend and rose, indicating that investors began to choose technology blue chip stocks. More and more investors are worried that chip companies are overvalued and are beginning to reduce their positions. In the first 12 trading days of this month, Intel, Micron, Applied Materials, Lam, Kelei, Western Digital, and GlobalFoundries fell by more than 20%; Marvell and SanDisk fell by more than 30%; Broadcom and Qualcomm fell by smaller amounts. Since the beginning of this year, Applied Materials, Marvell, AMD, Intel, Western Digital, Seagate, Micron, and SanDisk have increased by 106.30%, 122.03%, 131.49%, 157.56%, 177.02%, 186.02%, 197.45%, and 470.74% respectively. The current correction is reasonable.
The trend of U.S. inflation determines the policy direction of the Federal Reserve, and the resumption of war in the Middle East has led to rising oil prices, which has also made the Federal Reserve's decision-making more difficult. Uncertainty in monetary policy has become one of the important factors leading to financial market instability. In view of the current deterioration of the international political environment, the Federal Reserve is expected to maintain interest rate policy unchanged on July 29. Investors are becoming more risk averse. If the stock market continues to fall, investor losses will increase and market liquidity will become tight. Increased liquidity risk is another important factor in the instability of the financial market. As mentioned before, chip stocks have generally experienced astonishing gains this year, and chip stocks are overvalued. How will the market bubble burst? This is another question that worries investors the most.