Market Overview

Assets that performed well in the third quarter of this year include the Russell 2000 Index, gold prices, financial stocks, and U.S. Treasuries. Poorly performing assets included Ethereum, crude oil, and the dollar. Bitcoin and the Nasdaq 100 Index basically remained flat.

Currently, the US stock market is still in a bull market, and the main trend remains upward. However, the trading environment in the last few months of the year may lack performance themes, and the market's upward and downward space will be limited. The market continues to revise down the earnings expectations for the third quarter.

Recently, stock market valuations have adjusted, but the rebound was also quick. The current price-to-earnings ratio of 21 times is still far above the 5-year average. 93% of companies in the S&P 500 index have reported earnings, with 79% of companies exceeding earnings expectations and 60% exceeding revenue expectations. The stock price performance of companies that exceeded expectations is basically in line with historical averages, while the stock price performance of companies that did not meet expectations lags behind historical levels.

Corporate buybacks are currently the strongest technical support in the US stock market. Recent buyback activity has reached twice the normal level, at about 5 billion dollars per day. This buying pressure may continue until it gradually wanes after mid-September.

Large tech stocks have shown weakened performance in mid-summer, primarily due to lowered earnings expectations and a waning market enthusiasm for AI. However, these stocks still have long-term growth potential, making it difficult for prices to decline significantly.

Currently, the market finds it difficult to replicate the excellent risk-adjusted returns seen from October last year to June this year. The current stock market valuations are higher, economic and financial growth expectations are slower, and market expectations for the Federal Reserve are also higher. We observe that large capital is gradually shifting towards defensive themes. Therefore, it is more prudent to maintain a neutral stance on the stock market in the coming months.

Federal Reserve Chairman Powell made the clearest statement on interest rate cuts to date at the Jackson Hole meeting, and a rate cut in September is almost a certainty. However, he stated that the pace of policy easing will still depend on future data performance. This statement did not exceed market expectations, so the reaction in traditional financial markets was muted. The expectation for rate cuts within the year remains basically unchanged from before; if subsequent economic data improves, it may even lower the current pricing expectation of a 100 basis point rate cut.

The crypto market has reacted quite strongly, possibly related to excessive short accumulation and inconsistent understanding of macro news. It remains questionable whether the current market environment supports innovation highs for crypto assets. Generally speaking, in addition to a loose macro environment and risk appetite, support from crypto-native themes such as NFTs, DeFi, and spot ETFs is also needed. Currently, the growth momentum in the Telegram ecosystem appears strong and is expected to become the next theme, but it remains to be seen whether the latest token projects can bring in quality new users.

Capital Flow

The Chinese stock market continues to decline, but Chinese concept funds have seen net inflows for 12 consecutive weeks. This week, the net inflow reached $4.9 billion, a new five-week high, and it is also the highest inflow among emerging market countries. The possible buyers against the trend could be state-owned entities or long-term funds betting on a future rebound in the stock market.

According to Goldman Sachs client data, there has been a continuous reduction in A-shares since February, with a recent focus on increasing holdings in H-shares and Chinese concept stocks.

Despite the global stock market recovering and capital inflows, the low-risk preference money market has also seen inflows for four consecutive weeks, reaching a total scale of 6.24 trillion USD, setting a new high, indicating that market liquidity remains abundant.

The U.S. government's debt situation is a cause for concern. It is expected that within 10 years, the debt will reach 130% of GDP, with interest payments alone reaching 2.4% of GDP, significantly higher than the military expenditure required to maintain global hegemony at 13.5%. This situation is clearly unsustainable.

US Dollar Weakness

In the past month, the US dollar index has fallen by 3.5%, marking the fastest decline since the end of 2022, mainly related to the market's increased expectations for a Federal Reserve rate cut. This situation is similar to that in October 2022 when the market anticipated the end of the rate hike cycle, leading to a decrease in demand for the dollar. Now that the expectations for a rate cut are about to be realized, the decline of the dollar may continue. If the dollar falls too much, it could lead to the unwinding of long-term arbitrage trades, thereby suppressing the stock market.

Next week's two main themes: inflation and Nvidia

Next week, key attention will be on the US PCE inflation rate, the preliminary CPI for Europe in early August, and the Tokyo CPI and other price data. Major economies will also release consumer confidence indices and economic activity indicators. In terms of corporate earnings reports, the focus will be on NVIDIA's earnings report after the US stock market closes on Wednesday.

The PCE released on Friday is the last PCE data before the Federal Reserve's decision on September 18. Core PCE is expected to grow by 0.2% month-on-month, while personal income and consumption are expected to grow by 0.2% and 0.3%, respectively, remaining unchanged from June. This indicates that the market expects inflation to continue to grow moderately and not to decline further.

Nvidia Earnings Preview

Nvidia's performance is not only related to AI and tech stocks, but also serves as a barometer for overall market sentiment. Currently, demand remains strong, and the most critical factor is the impact of the delay in the Blackwell architecture. According to several analysis reports, the mainstream view on Wall Street believes the impact is minimal and maintains an optimistic outlook for this earnings report. Nvidia's actual performance over the past four quarters has consistently exceeded market expectations.

Main expected indicators of the market:

• Revenue of $28.6 billion, up 110% year-on-year, up 10% quarter-on-quarter
• EPS $0.63, YoY +133.3%, QoQ +5%
• Data center revenue of $24.5 billion, up 137% year-over-year, up 8% quarter-over-quarter.
• Profit margin of 75.5%, unchanged from last season

Key focus issues:

1. Delay Impact of Blackwell Architecture The first batch of chips is expected to be delayed by up to 4-6 weeks for shipment, pushing it to the end of January 2025. However, this new product was not included in the recent performance forecasts, so it will have little impact on the performance for Q2 and Q3 of 2024.

2. Existing product demand The decline in B100/B200 production can be compensated by increasing H200/H20. It is expected that H200 will generate $23.5 billion in revenue in the second half of 2024, which will be sufficient to offset the losses from B100 and GB200. The prospects for H20 GPUs in the Chinese market are optimistic. The increase in TSMC's CoWoS capacity will also support revenue growth.

3. Degree of Kinetic Energy Deceleration The revenue growth rate for the fiscal year 2025 is expected to slow from 126% to 73%. The growth rate for this quarter will further slow to the range of 1x%.

4. Demand in the Chinese Market Pay attention to the changes in customer interest after the launch of H20, the company's competitiveness against domestic competitors, and the launch time of B20 in 2025.

5. Product Line Changes The performance and pricing of the new A series products may be adjusted downwards, which could affect the company's pricing capability.

6. Stock Price Volatility NVIDIA's stock price has fluctuated significantly recently, but it is currently only 7% away from its historical high. The valuation is at the median level of the past three years.

7. Bull and Bear Hypothesis Goldman Sachs predicts that under different scenarios, the stock price has an upside potential of 41%-89% and a downside potential of 26%-61%. At the current price level, the potential return is still less than the risk.

8. Overall Outlook Despite some uncertainties, Nvidia's long-term growth momentum remains strong, and the market remains optimistic about it. AI demand may still be in its early stages, and the long-term outlook could exceed expectations.

![Cycle Capital Macro Weekly Report (8.25): Trends Slow Down, But Optimism for the Market Ahead This Year