According to the Futu Securities mobile app, China International Capital Corporation issued a research report stating that the sharp drop in the US stock market on Wednesday has attracted market attention and concern, with the NASDAQ index falling by 3%. Tesla (TSLA.US) and Alphabet financial reports were lower than expected, serving as the catalyst for this round of decline. There are currently many mixed signals and various factors at play, as well as emotional impact. While US growth is slowing, it is not a recessionary pressure, so trading based on recession would lead to "excessive pessimism" on risk assets and "excessive optimism" on safe assets. This is precisely why trading based solely on interest rate cuts cannot be extrapolated too far.

The sharp drop in the US stock market on Wednesday has attracted market attention and concern, with the NASDAQ index falling by 3%. Tesla and Alphabet financial reports were lower than expected, serving as the catalyst for this round of decline. How should we view this round of decline? What is the future of the US stock market? Why have recent asset performance been "chaotic"? Our comments are as follows:

1. Triggering factors: The recent sharp drop in the US stock market was largely dragged down by performances of companies such as Tesla that had previously accumulated substantial gains, and coupled with the Manufacturing PMI falling below 50. Once there is a significant drop, it is easy for trading to be amplified, such as through triggering CTA, VIX trading, etc. This is a typical pattern of each wave of fluctuation.

2. Background: The US stock market had accumulated substantial gains, so the expectation of an interest rate cut triggered some rotation of "large-cap stocks to small-cap stocks," and the "Trump trade" also affected oil, electric vehicles, copper, etc.

3. Is this a recessionary trade? Not quite. Let's put aside the fact that the US has no significant pressure or signs of recession. If it were a recessionary trade, US bond rates should have declined and gold should have soared, as these two are the assets that benefit most from recession. However, gold has plummeted and US bond rates have instead risen.

4. So what exactly is being traded? There are currently many mixed signals and various factors at play, as well as emotional impact. However, there are several major directions: 1) the growth direction of the US is slowing down, which is not a problem, so risk assets such as the stock market and commodities like copper and oil will be affected by this. The stock market is also under significant pressure due to the current situation, while copper and oil are impacted by the Trump policy. 2) However, this is not a recessionary pressure, so trading based on a recession would lead to "excessive pessimism" on risk assets and "excessive optimism" on safe assets, which may have issues. For example, in the past few days, gold and US bonds have shown this point. On the other hand, if they think about it the other way round, the current weakness in commodities and the US stock market can actually promote the Fed's interest rate cut. Once the interest rate is cut, some demand can be quickly restored. 3) This is precisely why trading based solely on interest rate cuts cannot be extrapolated too far. When interest rate cuts are realized, this type of trading should instead be retreating, while the risk assets on the numerator side should be focused on, which should have been weaker during this stage (such as the interest rate cut in 2019 that we have repeatedly reminded everyone of), but will provide more opportunities for subsequent repairs (more suitable after the decline). Taking copper as an example, when it previously rose to a high point, it meant that the interest cut would be pushed back, so caution was advised. When it dropped down, it meant that the interest rate cut and subsequent repairs were possible, so it should be approached from the opposite direction and traded one step ahead.

Regarding the US stock market, we previously gave a target of 5500 for the S&P 500 in the second half of the year, which has already been exceeded in recent days. Currently, the key technical support levels are 17,000 for the NASDAQ and 5300 for the S&P. In the short term, it can be allowed to settle and digest. We previously had a four-word phrase called "don't buy if it doesn't fall," which can now be followed up with the sentence "buy it back if it falls too much." With the denominator such as Russell 2000, there is greater short-term elasticity, but due to the limited degree of interest rate cuts, caution is advised, and stocks in the numerator such as technology leaders and later stages are still expected to perform well in the future.