Market Overview

Assets that have performed well since Q3 include the Russell 2000 Index, gold prices, financial stocks, and U.S. Treasuries, while poorly performing assets include Ethereum, crude oil, and the U.S. dollar. Bitcoin and the Nasdaq 100 Index have performed almost flat.

For the US stock market, it is currently still in a bull market, with the main trend upward. However, the trading environment in the few months leading up to the end of the year may lack performance themes, and the market will be limited in both upward and downward space. The market continues to downgrade Q3 earnings expectations.

Recently, valuations have seen a pullback but rebounded quickly, with a price-to-earnings ratio of 21 times still well 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% of companies surpassing revenue expectations. The stock price performance of companies that beat expectations is basically in line with historical averages, while the stock price performance of companies that missed expectations is weaker than historical averages.

Buybacks are the strongest technical support in the U.S. stock market, with corporate buyback activity recently reaching twice the normal levels, at about $5 billion per day. This buying pressure may persist until gradually fading after mid-September.

The performance of large tech stocks weakened in the summer, mainly due to lower earnings expectations and a decline in market enthusiasm for AI. However, the long-term growth potential of these stocks remains, making it difficult for prices to drop significantly.

From October last year to June this year, the market has experienced significant risk-adjusted returns. Currently, stock market valuations are higher, economic and financial expectations are growing more slowly, and the market has higher expectations for the Federal Reserve, making it difficult to replicate previous performance. Large funds are gradually shifting towards defensive themes, and a neutral stance on the stock market should be maintained in the coming months.

Federal Reserve Chairman Powell stated at the Jackson Hole meeting that a rate cut in September is a foregone conclusion, but the pace of policy easing will still depend on future data. Market expectations for a rate cut this year have largely remained unchanged.

The crypto market reacted strongly to this, possibly due to excessive short accumulation leading to a squeeze. However, there are still doubts whether the current market environment supports a new high for crypto assets; in addition to a loose macro environment, native themes are also needed for support.

Based on the experience from the gold market, the market structure has changed in the past two years, with the main purchasing power coming from central banks rather than retail and institutional investors. The inflow of Bitcoin ETFs significantly slowed down after April, which corresponds with its price peaking in March. If the risk-free rate of return does not decrease, it may attract more investors to enter the gold and Bitcoin markets.

In terms of stock positions, subjective strategy funds have quickly replenished their positions recently, bringing the position back to the historical 91st percentile, while systematic strategy funds have reacted more slowly, currently at the 51st percentile. Short sellers in the stock market have closed their positions during the downturn.

In terms of politics, Trump's approval rating has stopped falling, and betting odds are rising. The possibility of a Trump deal may heat up again, which is beneficial for the overall stock market or cryptocurrency market.

Capital Flow

The Chinese stock market continues to decline, but China-themed funds continue to see net inflows, with a net inflow of $4.9 billion this week, reaching a five-week high, marking 12 consecutive weeks of inflows. Compared to other emerging market countries, China has the largest inflows.

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 warming up and capital inflows, the low-risk preference money market fund sector has seen inflows for four consecutive weeks, with the total scale rising to $6.24 trillion, setting a new historical high, indicating that market liquidity remains ample.

The U.S. government debt may reach 130% of GDP within ten years, with interest payments alone reaching 2.4% of GDP, which is clearly unsustainable.

US Dollar Weakens

The US dollar index fell 3.5% over the past month, marking the fastest decline since the end of 2022, which is related to the market's increased expectations for a Federal Reserve rate cut. If the dollar falls too much, it may lead to the unwinding of long-term arbitrage trades, thereby suppressing the stock market.

Two Key Themes Next Week: Inflation and Nvidia

Focus on the US PCE inflation rate, the preliminary value of the August CPI in Europe, and the CPI in Tokyo. Major economies will release consumer confidence indices and economic activity indicators. In terms of corporate earnings reports, pay special attention to NVIDIA's quarterly performance.

Economists expect the core PCE inflation month-on-month growth to remain at 0.2%, with personal income and consumption growing by 0.2% and 0.3% respectively. The market anticipates that inflation will maintain a moderate growth momentum and will not decline further.

Nvidia Earnings Preview

Nvidia's performance is a barometer for AI, tech stocks, and even the overall sentiment of the financial market. The mainstream market view believes that the delay in the Blackwell architecture has little impact, maintaining an optimistic outlook for this earnings report.

Key performance indicators include:

• Revenue of $28.6 billion, year-on-year +110%, quarter-on-quarter +10%
• EPS $0.63, year-on-year +133.3%, quarter-on-quarter +5%
• Data center revenue of $24.5 billion, a year-on-year increase of +137% and a quarter-on-quarter increase of +8%
• Profit margin at 75.5%, unchanged from last quarter

Key Focus:

1. Delay Impact of Blackwell Architecture Expected to delay shipping by up to 4-6 weeks, with little impact on recent performance. The significant increase in H200 orders can offset some of the impact.

2. Existing product demand The demand for H200 and H20 is strong, expected to offset the impact of delays in B100/B200. TSMC's increased capacity will also support revenue growth.

3. Growth momentum slows down The revenue growth rate for the fiscal year 2025 is expected to slow down from 126% to 73%. The growth rate for this quarter will enter the 1x% range.

4. Intensifying Competition Competitors like AMD and Cerebras have launched new products, but the market expects Nvidia to maintain its dominant position.

5. China Market Pay attention to the H20 demand trends, domestic competition situation, and the launch time of B20.

6. Product Line Changes Changes in technical specifications and cooling methods for the new product may affect pricing capability.

7. Stock Price Fluctuation After significant fluctuations recently, it is currently only 7% away from the historical high. The valuation is at the median level of the past three years.

8. Bull and Bear Hypothesis Based on different assumptions, the stock price may increase by 41%-89% or decrease by 26%-61%.

Overview: Growth trends are slowing, but the overall outlook remains optimistic. Major risks come from the debunking of AI narratives, macro interest rates, and geopolitical uncertainties. Supply chain issues can be resolved and will not fundamentally undermine long-term growth momentum. The demand outlook for AI may still be in its early stages, and long-term demand for computing chips could exceed expectations.

![Cycle Capital Macro Weekly Report (8.25): Trend Slowing, But