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Shu Xiaoting, a reporter from 21st Century Business Herald, reports from Beijing

Over the past week, the three major U.S. stock indexes rose and fell. The Nasdaq Composite Index, which is dominated by technology stocks, fell 3.65% to 17,726.94 points, the largest weekly drop since April, ending a six-week rally. The Dow Jones Industrial Average rose 0.72% to 40,287.53 points, while the S&P 500 fell 1.97% to 5,505 points.

Glen Smith, chief investment officer at GDS Wealth Management, said the stock market is undergoing a long-overdue rotation, with investors moving money out of big tech stocks and into other areas of the market.

With the full arrival of summer, the market needs to assess the impact of many factors, including the Federal Reserve’s interest rate path, the core content of the earnings season, and the progress of the 2024 US presidential election.

It is worth noting that Biden's announcement of his formal withdrawal from the US presidential election has injected more uncertainty into the market outlook at this critical moment. Biden announced on July 21 that he would not seek re-election, which was another major change in the campaign season. Just a week ago, Trump was assassinated.

Yang Zirong, associate researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, told the 21st Century Business Herald reporter that in the coming period, as the US economy and monetary policy seek direction, the US election is highly uncertain, and global trade frictions may escalate, US stock market fluctuations will be more intense, and US stock style switching may continue and repeat. Under the expectation of the Fed's interest rate cut, high-priced super-large growth stocks represented by the "Big Seven" will continue to face periodic selling pressure, and small-cap stocks represented by the Russell 2000 will continue to benefit. In addition, there will be obvious differentiation within the "Big Seven", and Nvidia and Apple may be relatively strong. It is necessary to be vigilant that if the US unemployment rate unexpectedly rises sharply, even if the Fed starts to cut interest rates, US stocks may still face the risk of an overall decline.

UBS strategist Sagar Khandelwal said investors should take advantage of recent dollar strength by reducing their dollar exposure or employing volatility-selling strategies to generate income before the Federal Reserve is likely to start cutting interest rates in September.

Adopting a market switching strategy

With earnings season in full swing, bullish investors are hoping solid results will stem a rout in tech shares that has already cooled this year’s rally. Over the past week or so, the S&P 500’s technology sector has fallen nearly 6%, wiping out about $900 billion in market value, as expectations mount for rate cuts and a Trump reelection. The tech sector’s losses were partially offset by big gains in sectors including financials, industrials and small-cap stocks.

This week, the earnings of US companies will be in the spotlight of the market. On Tuesday, Tesla, Google's parent company Alphabet, Amazon and others will announce their results. Some market analysts pointed out that strong corporate performance may ease some of the concerns that have recently plagued large-cap stocks, including concerns about overvaluation. On the other hand, signs of declining profits or lower-than-expected AI-related spending will test the technology-led narrative that has boosted the stock market this year. According to public data, Alphabet, Tesla, Amazon, Microsoft, Meta Platform, Apple and Nvidia account for about 60% of the S&P 500's gains so far this year.

US President Joe Biden said on July 21 that he would not seek re-election and supported Vice President Harris as the Democratic presidential candidate. Market observers said Biden's decision could exacerbate volatility in the US stock market with less than four months to go before the November vote.

Fang Ming, director of the Global Financial Strategy Laboratory of Southwestern University of Finance and Economics, told the 21st Century Business Herald that the US stock market is facing the bursting of the artificial intelligence bubble, which is somewhat similar to the bursting of the Internet bubble in 2000. In addition to the artificial intelligence bubble, the US stock market is actually also affected by the Russian-Ukrainian conflict, the Israeli-Palestinian conflict and "de-risking". The Dow Jones Industrial Average and the S&P 500 both have large bubbles. In the coming period, the US stock market faces a greater risk of bubble bursting, and different stock indexes and major sectors, especially the financial sector, may be impacted. This impact will also affect the stock markets of developed countries and emerging market countries around the world that have soared. These countries may experience financial crises such as stock market bubble bursting, capital outflows, and currency depreciation, which may lead to a serious crisis in the real economy. The yields on government bonds in developed countries such as the United States and the European Union are relatively high, and global funds may flow to developed countries, especially the United States, in panic. When this crisis is formed, the Federal Reserve may start to cut interest rates, which will further enhance the attractiveness of its government bond market. This is determined by the global dollar cycle.

Fang Ming said that in the short term, assets invested in long US stocks should probably be transferred to the bond market, especially the Treasury market, and investors who are bearish on the US stock market can appropriately purchase short options on US stocks. In the short term, it may be necessary to appropriately avoid artificial intelligence stocks and real estate-related stocks or bonds, and gradually hold defensive stocks appropriately, such as large financial institutions, energy and consumer stocks. The most important strategy is market switching, that is, switching from the stock market to the Treasury market, and not "foraging" in the overly bubbled market. After the stock market bubble bursts to a certain extent, switch from the bond market back to the stock market, but the timing in between must be grasped. Generally speaking, this switching action can only be implemented after the stock market has truly bottomed out and rebounded, otherwise it may be bought in the process of decline, and suffer a large loss due to a sharp decline.

US inflation may continue to decline

Data released by the U.S. Department of Labor earlier in July showed that the U.S. CPI rose 3% year-on-year in June, lower than the market expectation of 3.1%, but slowed down from the year-on-year increase of 3.3% in May. The U.S. CPI fell 0.1% month-on-month in June, contrary to the market expectation of an increase of 0.1% and slowed down compared with May. This is the first monthly decline since May 2020, and the year-on-year increase of 3% is a sharp drop from the year-on-year increase of 9.1% in the summer of 2022.

On Friday, most traders and investors will be watching the release of the U.S. personal consumption expenditures (PCE) price index report for June. The PCE price index is considered the Federal Reserve's preferred inflation measure.

Yang Zirong pointed out that the month-on-month growth rate of the overall CPI in the United States in June turned negative for the first time in four years, and the core year-on-year growth rate hit a three-year low, which means that the PCE in June may also continue to decline. However, considering that the US retail data in June was better than expected, the possibility of the PCE data in June exceeding expectations cannot be ruled out. In the second half of 2024, benefiting from the easing of tension in the US labor market and the continued weakness of global demand, US inflation is likely to continue to decline. In 2025, considering the high uncertainty of the policies of the new US government and geopolitics, the possibility of a second rebound in global and US inflation cannot be ruled out.

Fang Ming pointed out that if domestic demand is still supported and energy prices may fluctuate, US inflation may still fluctuate in the future. Of course, if a systemic crisis caused by a sharp drop in the US stock market occurs, it will have a suppressive effect on demand, and the corresponding drop in energy prices will also reduce exogenous inflation pressure.

Global Economic Calendar

July 22 (Monday): German retail sales for May;

July 23 (Tuesday): U.S. existing home sales in June; S&P U.S. service and manufacturing PMIs in July; Tesla, Google parent company Alphabet, Amazon, Coca-Cola, and Visa announce earnings;

July 24 (Wednesday): U.S. new home sales in June; Bank of Canada announces interest rate decision; IBM announces earnings;

July 25 (Thursday): U.S. durable goods orders for June; U.S. GDP for the second quarter; U.S. initial jobless claims as of July 20; AstraZeneca, Honeywell, and Unilever announce earnings;

July 26 (Friday): U.S. PCE price index for June.