On Wednesday, July 31, U.S. stock indexes collectively rose, with the Nasdaq index rising by more than 2.6% and the S&P 500 index rising by more than 1.7%. The main driving force behind the surge in each index was the collective surge in tech stocks. Except for Microsoft, the "Big Seven Tech" all rose enthusiastically, with Nvidia rising by more than 12.8% to $117.02. Morgan Stanley re-rated Nvidia's stock as a "preferred stock" and maintained an "overweight" rating.
Technology stocks staged a roller coaster-like plot
The tech stocks that collectively surged on Wednesday seemed to be shaking people's nervous nerves every day, and their stock prices showed huge ups and downs. Nvidia, which plunged 7% on Tuesday, soared nearly 13% at night, and its market value increased by $330 billion in a single day. Other tech stocks also showed a volatile trend. Shockingly, Nvidia's volatility has even surpassed Bitcoin. Data shows that Nvidia's 30-day option implied volatility has recently soared from 48% to 71%, while Bitcoin's DVOL index (a measure of 30-day implied volatility) has fallen from 68% to 49%.
Behind the volatility, the market is concerned about the tech giants' fanatical investment in AI. As tech giants have released their financial reports one after another, data shows that AI investment expenditures are staggering, while revenues have not far exceeded expectations. The market obviously does not have enough patience to play the AI castle building game with tech giants, which has led to a sharp drop in the stock prices of the giants. Obviously, the giants are still determined to "throw money" at AI, and said that AI investment is currently helping some performance growth. More importantly, for them, AI investment is not just about pursuing profit growth, but has become a survival issue.
Beware of the risk of bubbles
Nvidia surged 12.8%, but its sustainability remains to be seen; Apple also rebounded from the decline, rising slightly by 1.5% on the day; Google A fell back after hitting a high on the day; Microsoft continued its decline, falling 1.08%; Meta rose 2.5%, rebounding after a continuous sharp drop; Amazon rose slightly by 2.9%, maintaining its rebound momentum. Overall, the positive market signals need to be further confirmed.
From the perspective of the overall US economy, the manufacturing industry is still sluggish. Data released by S&P Global showed that the US Markit Manufacturing PMI fell into contraction in July, hitting a 7-month low of 49.5%, and the new order index of private enterprises fell from 53.1 in June to 52.9 in July. Relevant institutions found that factors such as high interest rates, rising operating costs, a strong dollar and falling commodity prices have led to a slowdown in factory production activities across the United States. Companies have begun to lay off employees and reduce production to cope with falling orders and rising inventories, in preparation for possible long-term sluggish demand.
In the earnings season, the performance of US listed companies was also lower than expected. According to FactSet data, after listed companies announced second-quarter earnings that were lower than expected, the company's stock price fell an average of 3.8% within two days after the quarterly report was released compared to before the quarterly report was released. At the same time, the stock price increase of companies with better-than-expected performance was not as good as before. Such stocks rose only an average of 0.3% within two days after the quarterly report was released, while the average increase in the past five years was 1%. This phenomenon reflects the market's "high expectations" and "overvaluation" for the earnings season.
Will the Fed cut interest rates as early as September?
The Fed's resolution and Powell's press conference both hinted that interest rates may be cut in September. U.S. stocks, U.S. bonds, crude oil, gold, and the yen rose, and market expectations for interest rate cuts increased. The "New Fed Megaphone" analyzed that the Fed's statement deleted the wording of "high attention" to inflation risks in the past two years. This change is of great significance, indicating that inflation may no longer be an obstacle to interest rate cuts, especially when the labor market continues to cool. Recently, the U.S. dollar exchange rate and gold have risen together, and the VIX index, which reflects market panic, has also risen significantly recently, rising to 18.46 on July 25, the highest record since April 22.
Before the Fed cut interest rates, the logic of loose market trading liquidity is good for US stocks, but there may be uncertainty after the rate cut. Because the current valuation of US stocks is already high, especially the "Seven Tech Giants", they are likely to face a bubble crisis in the case of insufficient technology transformation or penetration. Investors should strengthen their defensive strategies to prevent the potential decline risks faced by holding stocks.
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Source: uSMART SG
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