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Wang Yinggui, special researcher of this newspaper

Following the across-the-board decline in U.S. financial markets last Friday, fear in the U.S. stock index futures market intensified on Monday. As of press time, the Volatility Index (VIX) broke through 50 points, the S&P 500 index fell below 5,100 points, the U.S. dollar index fell 0.83%, and Bitcoin once fell below $50,000.

The market crash stemmed from a weaker-than-expected employment report. On August 2, Eastern Time, the U.S. Department of Labor released the July employment market report, which once again confirmed that the U.S. job market continued to cool: the unemployment rate rose to 4.3%, the highest since November 2021; 114,000 new jobs were created, the lowest since January 2021. Last week, Facebook (META), Apple, Microsoft and Amazon released their second-quarter earnings reports, which disappointed investors. The huge investment in AI did not significantly improve the operating performance of the technology giants.

Layoffs hit most industries

The latest report from the U.S. Department of Labor shows that, except for a few industries, layoffs have expanded to many industries. The industries with more new jobs include: construction (25,000), commerce, transportation and warehousing (22,000), medical and social work (64,000), accommodation and catering (25,600) and local government education departments (26,200), while the industries with comprehensive layoffs include: mining and logging, manufacturing, information industry, finance and insurance, professional and technological services and other services. In July, 114,000 new jobs were added. Considering the recent downward revision trend (the preliminary data in June was 209,000, and the revised data was 179,000), the revised data may be less than 100,000 jobs.

In July 2024, the total number of non-agricultural employment in the United States was 158.723 million, a net increase of 2.742 million compared with July 2023, mainly concentrated in the service industry and government departments (local government education institutions). It is worth noting that except for construction, other commodity production departments are laying off employees; in the service industry, information and financial services are laying off employees, while transportation and warehousing industries and private education and health departments (major medical institutions) provide more employment opportunities; local government education institutions provide nearly 44% of new jobs.

Inflation in the United States is a thing of the past, but the negative impact on the economy will continue, widening the social income gap. From the perspective of the consumer price index, compared with March 2021 (the month before high inflation), it rose by 18.17% in July 2024. The private sector employment accounts for 85.3% of the United States, and the hourly wage has increased by 16.24%. The retail industry, which has the lowest hourly wage, accounts for 9.88% of the employment in the United States, and the wage growth is only 12.28%. The private education and health sector accounts for 16.66% of the employment, and the hourly wage growth is 15.98%.

If there are problems in the US job market, economic growth will face severe challenges. Once the July employment data was released, the instinctive reaction of the financial market was that an economic recession was coming and a "hard landing" was inevitable.

AI returns fail to convince investors

According to relevant statistics, from January to June 2024, the US technology industry laid off 19,400, 15,600, 7,400, 22,000, 9,900 and 10,000 employees respectively. Can technology giants stand out? Smart investors are eager to see a return on their investment and want to know whether the huge AI investment has increased the income level of technology giants. In the case of continuous layoffs in technology companies, can technology giants gain the first-mover advantage of generative artificial intelligence?

Google's main operating indicators were stronger than market expectations, but the video site YouTube's advertising revenue was $8.66 billion, lower than the expected $8.93 billion, and cloud service revenue was $10.35 billion, slightly higher than the expected $10.2 billion. Market investors believe that YouTube's revenue is weak, and the competitive pressure from TikTok has increased. At the same time, Google's generative artificial intelligence platform, Gemini, has not improved the company's business as expected, and the growth rate of cloud service revenue has also been lower than expected. In the second quarter, Google's capital expenditure exceeded $13 billion, and future quarterly expenditures will be at least $12 billion. Since the performance report was released on July 23, Google's stock price has fallen 8.5%. On the same day, Tesla reported a sharp decline in performance, the launch of new products was postponed, and no one cheered for the AI ​​project. So far, the stock has fallen 15.71%.

Last Tuesday, Microsoft and Amazon announced their earnings, and the results disappointed the market. Although Microsoft's revenue and earnings per share were slightly better than expected, its intelligent cloud services (public cloud Azure, Windows Server, artificial intelligence platform Nuance and software project hosting platform Github) had revenue of $28.52 billion, lower than the market expectation of $28.68 billion, and a growth rate of 29% (8% of which came from artificial intelligence services), which was also lower than the market expectation of 31%.

Amazon's overall revenue fell short of expectations, and its future outlook is pessimistic; Amazon Web Service revenue reached $26.3 billion, up 19%, lagging behind Microsoft and Google; digital advertising revenue was $12.8 billion, lower than the expected $13 billion; in the first half of the year, capital expenditure totaled $30.5 billion. In the past month, Microsoft and Amazon stocks fell 11.35% and 15.08% respectively.

Last Wednesday, Facebook released quarterly results that were better than market expectations, with digital advertising revenue growing 22%, twice that of Google, and quarterly capital expenditures of $8.47 billion, lower than the expected $9.51 billion, with full-year expenditures of $37 billion to $40 billion. Last Thursday, Apple's performance was unveiled, with various indicators stronger than expected, reflecting the company's robust operations, but its main mobile phone business is challenged by Chinese brand mobile phones. Apple has promised to integrate AI products into its services. In the past two weeks, the stock prices of these two companies have hardly changed.

Nvidia has not yet announced its quarterly results, but judging from the AI ​​business of other companies, the market demand for high-end chips will weaken, which will inevitably affect Nvidia's performance, and its inflated stock price will be put to a major test. In addition, Nvidia's new AI chip has been delayed due to design issues. Intel's performance is far below expectations, and its future outlook is pessimistic. In order to save costs, it announced a 15% layoff. On the same day, its stock fell by more than 20%, which is rare in 50 years. In the past month, the Philadelphia Exchange Semiconductor Stock Index fell by 15.80%, but Intel's stock fell by 31.22%. The former leader is getting worse year by year.

How big is the US stock bubble?

Judging market trends is challenging because the market is always in a state of dynamic change. There is no credible standard for judging market bubbles, and various contradictory predictions often end up being self-defeating. Wall Street's existing evaluation standards still have a certain degree of credibility. First, the earnings yield is relatively intuitive and easy to understand. It is expressed as the earnings per share of the stock divided by the current price, that is, the yield for every 100 yuan invested, or expressed as the stock price divided by the earnings (price-earnings ratio, P/E ratio). Although the S&P 500 index has hit a record high more than 30 times in 2024, the yield is on a downward trend, remaining at 3.51% as of early August, with a price-earnings ratio of 28.49 times. Compared with the 3.79% yield on the US 10-year Treasury bond (last Friday's closing price), the weighted yield of the S&P 500 index, which is composed of high-quality stocks, is lower than the Treasury bond yield. Moreover, the Treasury bond yield has exceeded 4.2% for most of this year! By this standard, US stock prices are high and have a large bubble component. Of course, investors invest in the stock market not only for stock yields, but also care more about the company's growth potential.

Second, the dividend rate is also an important value measure. From March 2018 to June 2024, the weighted dividend rate of the S&P 500 index showed a downward trend, reaching 1.32% at the end of the second quarter of 2024. For pension funds and retirement fund accounts, they hope to obtain stable dividend income to meet their financial needs after retirement. Also, compared with the yield of government bonds, the dividends of the constituent stocks of the S&P 500 index are relatively low.

In order to squeeze out the stock market bubble, stock market adjustments are necessary. The key lies in the intensity of the adjustments: fine-tuning, moderate adjustment or drastic adjustment? In the case of unchanged earnings or dividends, a drop in stock prices will help restore the balance between supply and demand in the market.

Will the U.S. economy fall into recession?

After the release of the US non-farm payrolls data last Friday, the market is no longer concerned about whether the Fed will cut interest rates in September, but how much: 25 basis points or 50 basis points? Secondly, the US economy may face a hard landing, as the shadow of recession seems to be getting closer. Admittedly, the market reaction is a bit extreme, because the continued cooling of the job market does not mean that the unemployment rate will rise rapidly, and the market trend will definitely fluctuate. But it can be seen that the mentality of investors has changed, and they are more or less like a frightened bird. Whether the US economy is in recession is indeed the most important issue, and investors have to take it seriously.

Personal consumption is the cornerstone of the US economic development. Weak household consumption will inevitably drag down economic growth. At present, US inflation has come down, but it does not mean that prices have returned to the level before inflation, but that the increase in prices has slowed down. More than three years of high inflation has seriously weakened the purchasing power of households, and household debt has reached a historical high. If the unemployment rate rises, household consumption will find it difficult to play the role of "firefighter" again.

Private sector investment is an important force in driving employment, and corporate capital formation is crucial. From January to July 2024, US equity financing reached US$120.3 billion, higher than US$74.1 billion in the same period last year. Despite the good performance of the stock market, corporate equity financing is not very active; in addition to the issuance of treasury bonds, US bond issuance was US$2.79 trillion, slightly higher than US$2.61 trillion in the same period last year, and it is estimated that the full year will be the same as a normal year before the epidemic. If domestic consumption is not strong and overseas market demand is weak, companies will not easily expand reproduction or increase inventory levels. In addition, US net exports contribute less to economic growth because the US trade is often in deficit.

Government spending and consumption are constrained by the budget, making it difficult to stimulate economic growth. The total debt level of the U.S. federal government has exceeded 35 trillion U.S. dollars, and the government's annual interest expenditure has become the largest expenditure after social security. Once the economy is in recession, the market can no longer rely on the federal government, and the Federal Reserve must intervene in the market again. However, in recent years, the Federal Reserve has made many policy mistakes, its reputation has been greatly affected, and the quality of its decision-making has been questioned by the market. Even if the economy is in recession, the Federal Reserve is powerless to turn the tide. In the election year, the Federal Reserve is cautious. The Federal Reserve's decision-making is not subject to government intervention, but the appointment of key Federal Reserve officials must be nominated by the president and approved by Congress.

The international economic environment has also changed. The US government has pursued a policy of decoupling and breaking chains, which has torn apart the existing international economic order and led to rising economic operating costs. International geopolitical risks may impact the fragile economic foundation at any time.

The market is pessimistic about the employment report, and the "Sam Rule" has become a high-frequency word. According to research by Claudia Sam, a former economist at the Federal Reserve, if the three-month moving average of the unemployment rate is 0.5% higher than the lowest value in 12 months, the economy is in recession. This theory has well predicted the previous US recession, but the economic environment is changing, and mechanically copying the rules will lead to cognitive bias. After all, the number of first-time unemployment claims in the United States is still at a low level.

The US fiscal deficit continues to expand, and the Federal Reserve has intervened in the market on a large scale. On July 31, the balance sheet size reached 7.23 trillion US dollars, which is still at a high level. After paying such a high price, the US economic growth rate (in recent quarters) has fallen back to the pre-epidemic level. Generative artificial intelligence has triggered an investment frenzy, but the highly anticipated artificial intelligence applications have not been transformed into real productivity. Before the next Fed meeting (September 17-18), the Fed has a chance to digest the employment situation in August. The economic recession has been popular in the US market for a long time. The author believes that the US economic growth will slow down, but it will not fall into recession; it is difficult for the stock index to rise, but there is a large room for downward adjustment. There will be a small rally after the results of the November election are released.