Financial Association News, August 27th (Editor Xiaoxiang) The Dow Jones Industrial Average reached a new historical high, and over half of the constituents of the S&P 500 Index rose, but at the same time, the sharp decline in technology stocks dragged the Nasdaq down 0.85% ...

Are you familiar with this scene?

That's right, in the early stages of last month's rotation in the U.S. stock market, that's roughly how the market operated. And now, with people being extremely cautious about trading technology stocks ahead of Nvidia's financial report release, and at the same time, as people's expectation for a soft landing increases due to the Fed's interest rate cut expectation, a similar scene is happening again.

As of the close of Monday, the S&P 500 Index fell to 5616.84 points with scarce trading volume. In contrast, the CSI 500 Equal Weight Index (which gives the same weight impact to small-cap companies as well as technology giants) continues to hover near its historical high, and the breadth of market-leading stocks has expanded to a wider range of sectors. The Dow Jones Industrial Average even rose to a high of 41,420.05 points during the session, setting a new historical high.

Nvidia's financial report

In response, Scott Rubner, Managing Director of Goldman Sachs Global Markets Division, pointed out that the strong inflow of funds from corporate buybacks and systematic funds should drive the S&P 500 Index to a new historical high this week, thereby further increasing investors' fear of missing out (FOMO) sentiment.

Ohsung Kwon, a strategist at Bank of America, said that Powell has almost locked in a rate cut for September at the Jackson Hole Central Bank annual meeting, which allows us to maintain the argument of expanding market breadth/rotation. Of course, one should not overlook Nvidia's financial performance this week, which is the continuous driving force behind the return on the S&P 500 Index. If the financial performance is disappointing, there is still market risk.

He estimates that there will be as much as $17 billion of non-emotional demand from algorithmic trading and corporate buybacks every day this week. Commodity trading advisors (CTAs) will engage in what is known as "green loot", meaning that these funds may buy stocks regardless of how the market is trading.

Mark Hackett, Nationwide's Director of Investment Research, states that the market has entered a healthy phase in the past few weeks, moving away from excessive reliance on several major technology companies in the first seven months of this year. However, he points out that we are currently in a "market pause period". Historically, September is the worst month on the calendar, so investors should expect some volatility, especially if there is disappointment in key indicators such as PCE inflation data, Nvidia's financial report, or upcoming wage announcements.

According to CFRA data, September has always been the weakest month for stock performance, with the S&P 500 index falling an average of 0.78% during the month since World War II.

Chris Larkin, of Morgan Stanley's E*Trade brokerage platform, believes that for the stock market to reach new highs this week, it may need to avoid any major surprises in earnings reports, especially from Nvidia, which has been driving sentiment in the technology sector.

Currently, analysts have high expectations for the quarterly earnings report from this giant chip manufacturer, and it is expected that its performance will once again significantly exceed expectations, which may prompt the company to raise its profit guidance. Citigroup said last week that options market trading indicates that investors anticipate a potential 9% two-way swing in the S&P 500 index the day after Nvidia's earnings report is released.

"Make way, Powell. It's Huang Renxun's turn to drive the market," said Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, in reference to Nvidia's earnings report. "In our view, Nvidia's earnings report this week may actually have a bigger impact on the overall market than Powell's speech at Jackson Hole last week."

Of course, in addition to the performance of technology giants such as Nvidia, with the Federal Reserve's interest rate cut almost certain, investors are expected to further increase their focus on economic data in the coming months to determine whether the "soft landing" argument for the US stock market to rise in 2024 can continue. This itself is the underlying logic of the concept of stock market rotation.

Federal Reserve Chairman Powell said last Friday that the "time for rate cuts has come" - this is more dovish than many investors had expected to hear at the Jackson Hole Annual Symposium. This rate cut process may begin next month: the Fed is expected to cut rates by 25 basis points at its September 17-18 interest rate meeting.

However, the Fed's statement is far from being a clear signal of market trends. The S&P 500 index has risen 18% year-to-date and is currently trading at a high valuation. Market participants need to continue to see evidence that the economy is heading for a soft landing - that is, whether economic growth can remain resilient while inflation cools.

Alessio de Longis, Senior Portfolio Manager and Investment Director at Invesco Solutions, said, "The market does hope to hear the news that the rate cut cycle has begun. But is the Fed actually telling us that they are now concerned about the economy? If so, perhaps the excitement about the rate cut cycle should be viewed from a different perspective."

Historically, if rate cuts are implemented against the backdrop of a recovering economy rather than a sharp economic slowdown, the stock market tends to perform much better. According to Evercore ISI strategists, since 1970, during non-recessionary periods, the S&P 500 index has averaged an 18% increase one year after the first rate cut. In contrast, during economic recessions, the index has only averaged a 2% increase one year after the first rate cut.

More signs of economic weakness could once again shake the stock market and shift expectations for the magnitude of the rate cut next month towards 50 basis points.

Quincy Krosby, Chief Market Strategist at LPL Financial, says that a key factor for the stock market is whether the rate cut is due to slowing inflation or a weak labor market. He points out, "The market hopes that the launch of the rate cut cycle is due to a declining inflation rate. But the question still remains whether we will see further deterioration in the labor market."

If bad news hits, high stock valuations may also discourage investors from holding stocks. According to data from LSEG Datastream, the forward price-to-earnings ratio of the S&P 500 index is currently around 21 times, higher than the 19.6 times at the beginning of August. The long-term average value of this indicator is 15.7 times.

The intense presidential competition between current Vice President Harris and former President Trump may also bring ongoing uncertainty during the period leading up to the November 5th election.

Andre Bakhos, Managing Director of Ingenium Analytics LLC, said, "Although the long-term trend of stocks is solid, any weakness is an opportunity to increase investment positions. However, in the short term, we will face turbulent and unpredictable fluctuations because no one really knows what will happen after he (Powell) reveals his hand."

Editor/Somer