Re inflation risk restarts, interest rate cuts may face short-term endpoint
Based on the leading lagging relationship of economic indicators, we predict that the United States will face pressure for a year-on-year increase in CPI in 2025. If the year-on-year CPI exceeds+3%, it becomes what we define as're inflation '. However, reports and price data from research institutions indicate that the market's understanding of the risk of reinflation is still insufficient. In this context, we believe that the Federal Reserve may only cut interest rates by 25bp in the first quarter of 2025.
Short term endpoint of bull market: Stagnation of debt expansion by mid-2025
In the context of sustained high interest rates, the debt pressure on the US private sector has begun to emerge, with high loan delinquency rates, and the expansion of household debt has basically come to a halt, while debt contraction usually means recession. The economic cycle timing framework indicates that the expansion period will continue until the second quarter of 2025. Therefore, we expect the US economy to start landing in the second half of 2025.
Using the 'intrinsic return model', the target price for the S&P 500 in the second quarter is estimated to be 6300-6350 points; After entering the systolic phase, the target price by the end of 2025 is 5550-5600 points.
US Chief Bull Ending Point: After Significant Deficit Reduction in the US Treasury
Under unrestrained fiscal expansion, US Treasury bonds have transformed from "value preserving assets" to "depreciating assets". As a result, other 'value preserving assets' are decoupled from the valuation of US Treasury bonds. A typical phenomenon is that the risk premium of the US stock market has broken through the historical bottom line, indicating that its US dollar price has deviated from the "gravity".
Only with a significant fiscal tightening can the logic of the US Chief Bull be broken. According to our calculations, based on the annualized static level in the third quarter of 2024, a deficit reduction of $860 billion will make US bonds a "hedge asset" and disrupt the long bull market of the US stock market, but this is quite difficult.
In terms of style, the S&P 500, represented by large enterprises, has decoupled faster; The Russell 2000, which represents small and medium-sized enterprises, has a slower decoupling, but there is a possibility of catching up with latecomers. Therefore, if the US fiscal continues to expand, we should be optimistic about Russell 2000.
The end point of the bull market for tech giants has not yet appeared
By approaching the future market size that has already been priced with a 'endgame mindset', we found that the current valuation of AI powered card giants (mainly NVDA) only includes one large model iteration (with parameters reaching the 10 trillion level), while a large model with parameters reaching the trillion level is completely predictable. Therefore, we believe that the long-term rise of semiconductor giants is not over yet. At this time, even if there is a round of potential foam in the future, the probability will not lose money; The pricing of other software industries and Internet giants is even more conservative.
Traditional industry recommendation
Under the DCF system, we recommend energy, food and tobacco, medical equipment and services, and telecommunications operators. Wall Street recommendations: healthcare, information technology, communication, retail, capital goods.