To The Moon

U.S. stock markets have been volatile recently, especially after $Tesla (TSLA)$ and $Google (GOOG)$ earnings fell short of expectations, with $S&P 500(.SPX)$ and $Nasdaq (.IXIC)$ indices plunged 2.3% and 3.6%, respectively, on July 24, marking their biggest one-day declines since 2022.

This phenomenon triggered widespread concern and market panic.

At the same time, commodity prices such as copper and crude oil also continued to weaken, creating a situation in which risky assets fell across the board.Market concerns about the U.S. economy falling into recession have increased, but a comprehensive analysis shows that U.S. stocks are not currently trading in a recession, but are influenced by a variety of factors.

Trading characteristics

On slowing growth

While the pullback in U.S. stocks and other risk assets does reflect the slowing growth factor, it does not mean that the U.S. economy is in recession.The latest U.S. GDP growth for the second quarter came in at 2.8% annualized year-over-year, well ahead of expectations of 2% and better than the 1.4% in the first quarter.

In addition, the overall and core PCE (personal consumption expenditures) for June also exceeded expectations.These data suggest that while economic growth is slowing, there are no clear signs of a recession.

Macro uncertainty

Macroeconomic uncertainty is one of the key factors in the current market volatility.

Changes in expectations of interest rate cuts and political variables in the U.S. elections are affecting market sentiment.For example, the intertwining of the Trump trade and the rate cut trade has led to increased market volatility.Historical data shows that in the run-up to an election month, intensive changes in electoral sentiment tend to dampen risk appetite, leading to a rise in the $ S&P 500 Volatility Index (VIX)$ and underperformance of U.S. stocks.

The early timing of the election debates this time around also allowed for an early start to election trading, adding to market uncertainty.

Profit-taking amplified by trading factors

The recent market volatility was more a result of the gains accumulated in the previous period being amplified by the catalyst of macro variables.

Tesla and Google Mother fell 5.0% and 12.3% respectively after announcing their results on July 23, dragging down the broader market performance.Coupled with the quantitative trading now evident, the performance of leading individual stocks has a strong demonstrative and amplifying effect on U.S. stocks as a whole, especially when these companies represent as much as 30% of total market capitalization.

Market Performance

Tech stocks lead the way down

The current round of U.S. stock declines has not been a general decline, but has spread outward from the hugging tech windfall.The S&P 500 communication services and information technology sectors have led the decline, down 10% since the July 10 stage high.However, the real estate, energy, financials and industrials sectors remain higher.This suggests that the market is undergoing a style rotation, moving away from technology stocks to cyclicals.

Rising risk premium

With risk-free rates essentially unchanged and earnings expectations little changed, valuation contraction was mainly due to an elevated risk premium.The Magnificent 7 fell 11.5%, with a 12.1% drag from elevated risk premiums.The Dow Jones still rose 2.2%, with positive earnings contributions.

Safe-haven asset performance

Safe-haven assets such as gold and U.S. bonds did not rise sharply during the U.S. equity selloff, which is inconsistent with typical recessionary trading.

Gold fell 2.2% and US bond rates approached 4.3% from 4.2%.The "steepening" of the interest rate curve, with short-end rates falling and long-end rates flat, is also not consistent with recessionary trading.Much of this is priced into the slowdown in inflation.

Future Outlook

Rate cut expectations

Tighter financial conditions have instead helped the Fed to land a rate cut.Recent volatility has seen the Financial Conditions Index rise to 99.3, the highest since June 10, from a low of 98.9 on July 16th.This is helping to dampen demand and inflation, contributing to the September Fed rate cut.

Growth outlook

Despite increased market volatility, we are not pessimistic about the medium-term growth outlook.The current correction is more a normal part of the pre-interest rate cut and growth slowdown than a recession.The Fed's rate cuts could have a positive effect, especially if interest rate-sensitive segments such as real estate and investment repair again.

Summary

On balance, the current volatility in the U.S. stock market is mainly due to profit-taking amplified by slowing growth, macro uncertainties and trading factors, rather than signs of recession.Investors should look at market volatility rationally and avoid excessive pessimism and panic.The market is expected to return to the growth track after the adjustment in anticipation of interest rate cuts by the Federal Reserve.