Market Overview

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

For US stocks, it is currently still in a bull market, with the main trend remaining upward. However, the trading environment in the months leading up to the end of the year may lack performance themes, and the market's upside and downside potential will be limited. The market continues to revise down its earnings expectations for the third quarter.

Recently, the valuation has pulled back, but the rebound has also been quick. The current price-to-earnings ratio of 21 times is still far above the 5-year average.

93% of the companies in the S&P 500 index have reported earnings, with 79% of companies exceeding earnings per share expectations, and 60% of companies exceeding revenue expectations. The stock price performance of companies that surpassed expectations is roughly in line with historical averages, while the stock price performance of companies that fell short of expectations is weaker than historical averages.

Corporate buybacks are the strongest technical support in the U.S. stock market. In recent weeks, corporate buyback activity has reached twice the normal levels, averaging about $5 billion per day. This buying power may continue to gradually fade after mid-September.

Large technology stocks have shown weakened performance in mid-summer, mainly due to lowered earnings expectations and a decline in market enthusiasm for AI themes. However, the long-term growth potential of these stocks remains, making it difficult for prices to drop significantly.

The market has previously experienced excellent 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 for future performance to repeat previous levels. Large funds are gradually shifting towards defensive themes, such as increasing holdings in the healthcare sector. This trend is not expected to reverse quickly, and a neutral stance towards the stock market should be maintained in the coming months.

At the Jackson Hole meeting on Friday, Federal Reserve Chairman Powell made the clearest statement yet regarding interest rate cuts, confirming that a rate cut in September is a done deal. He expressed a desire not to further cool the labor market and has increased confidence in inflation returning to the 2% target. However, he still emphasized that the pace of policy easing will depend on future data.

Powell's statement this time did not exceed expectations, and the response from traditional financial markets was muted. The market is most concerned about whether there is a possibility of a single 50 basis point rate cut within the year, to which Powell did not hint. Currently, the expectations for rate cuts this year are basically consistent with previous ones. If future economic data improves, the current expectation of a 100 basis point rate cut may even be adjusted downward.

The cryptocurrency market has reacted quite strongly, possibly due to excessive accumulation by short sellers leading to a squeeze, as well as the lag in the cryptocurrency market's understanding of macro news. However, it is still questionable whether the current market environment supports cryptocurrency assets hitting new highs. Generally speaking, in addition to a loose macro environment and risk appetite, support from cryptocurrency-native themes is also needed. Currently, the strongest theme is mainly the growth of the Telegram ecosystem, and its potential still needs to be observed through the performance of the latest token projects.

The rise in the crypto market is also related to the significant downward revision of last year's non-farm payroll data in the United States. However, this correction is not very meaningful, as it overlooks the contribution of illegal immigrants. The traditional market reacted mildly to this, while the crypto market views it as a sign of substantial interest rate cuts.

The structure of the gold market has changed in the past two years, with central banks becoming the main buying force. The inflow of funds into Bitcoin ETFs has significantly slowed down since April, which aligns with the peak in its price in March. If risk-free yields decline, it may attract more investors to enter the gold and Bitcoin markets.

In terms of stock positions, subjective strategy funds have been replenishing quickly recently, with positions back to the historical 91st percentile. Systematic strategy funds are responding slowly, currently only at the 51st percentile. The bears in the stock market have closed their positions during the decline.

In terms of politics, Trump's approval rating has stopped declining, and gambling support has increased. Trump's dealings may heat up again, which would be beneficial for the overall stock market or cryptocurrency market.

Capital Flow

The Chinese stock market continues to decline, but China-themed funds are experiencing sustained net inflows. This week saw a net inflow of $4.9 billion, reaching a five-week high, with net inflows for 12 consecutive weeks. Compared to other emerging market countries, China has the highest inflow. Those increasing their positions against the current market downturn may be state-owned entities or long-term investors.

Structurally, Goldman Sachs clients have been continuously reducing their holdings in A-shares since February, while recently mainly increasing their holdings in H-shares and Chinese concept stocks.

Despite the recovery of global stock markets and inflows of funds, the low-risk preference in the money market funds has also 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 abundant.

The financial situation of the United States deserves ongoing attention. It is expected that within ten years, the U.S. government debt may reach 130% of GDP, with interest payments alone reaching 2.4% of GDP, far exceeding the military spending necessary to maintain global hegemony at 13.5%, which is clearly unsustainable.

US Dollar Weakens

In the past month, the US dollar index has dropped by 3.5%, marking the fastest decline since the end of 2022, which is related to the market's increased expectations for a Federal Reserve rate cut.

Looking back at early 2022, the Federal Reserve actively raised interest rates to combat inflation, strengthening the dollar. However, starting in October 2022, the market began to anticipate the end of the rate hike cycle and even the possibility of rate cuts. This expectation led to a decrease in demand for the dollar, causing it to weaken.

The current market seems to be a replay of previous years, but the speculation back then was too ahead of its time, and now the expectation of interest rate cuts is about to materialize. If the dollar declines too much, the unwinding of long-term arbitrage trades may become a force that suppresses the stock market.

Two major themes next week: Inflation and Nvidia

Next week, focus on the U.S. PCE inflation rate, the preliminary CPI for Europe in early August, and the CPI for Tokyo among other price data. Major economies will also release consumer confidence indices and economic activity indicators. In terms of corporate earnings, pay special attention to NVIDIA's earnings report after the market closes on Wednesday.

The PCE released on Friday is the last PCE price data before the Federal Reserve's next decision on September 18. 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, unchanged from June. The market expects inflation to maintain a moderate growth momentum and not decline further, leaving room for potential downside surprises.

Nvidia Earnings Preview - Clouds Clearing, Expected to Inject Strong Confidence into the Market

NVIDIA's performance is not only related to AI and tech stocks but also affects the overall sentiment of the financial market. Currently, demand is not an issue; the key concern is the impact of the delayed Blackwell architecture. According to several institutional analysis reports, the mainstream view on Wall Street believes the impact is minimal, maintaining an optimistic outlook for this earnings report. Over the past four quarters, NVIDIA's actual performance has exceeded market expectations.

Core market expectation indicators:

• Revenue of $28.6 billion, a year-on-year increase of 110%, and a quarter-on-quarter increase of 10%.
• EPS $0.63, a year-on-year increase of 133.3%, and a quarter-on-quarter increase of 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 75.5%, unchanged from last quarter

The most concerning issues:

1. Blackwell architecture delay impact Analysis suggests that the first batch of Blackwell chips will be delayed by 4-6 weeks at most, expected to be postponed until the end of January 2025. Many customers have turned to purchasing the H200, which has a shorter delivery time. TSMC has begun production of Blackwell chips, but due to the complexity of the packaging technology, the initial output is lower than planned.

This new product was not included in the recent performance forecast. Blackwell is not expected to enter sales projections until the fourth quarter of 2024, and NVIDIA only provides guidance for a single quarter, so the delay will not have a significant impact on the performance for the second and third quarters of 2024.

2. Existing product demand is rising The decline in B100/B200 production can be compensated by increasing H200/H20 in the second half of 2024. A significant increase in H200 orders is expected, with a growth of 57% from the third quarter of 2024 to the first quarter of 2025.

It is expected that the revenue from H200 in the second half of 2024 will be $23.5 billion, sufficient to offset the potential loss of $19.5 billion from B100 and GB200. The H20 GPU is performing strongly in the Chinese market, with a possible shipment of 700,000 units in the second half of 2024, implying a revenue of $6.3 billion.

In addition, the stepwise increase in TSMC's CoWoS capacity may also support revenue growth from the supply side.

3. Degree of Kinetic Energy Slowdown In addition to the slowdown in spending growth from large enterprises next year, Nvidia's performance growth will also further slow down. The market expects revenue of $105.6 billion for the fiscal year 2025, with growth slowing from last year's 126% to 73%. This quarter's performance growth will further slow from the 200%+ range to the 100%+ range.

It should be noted that more and more participants are entering the AI market. Companies like AMD and Cerebras are launching new products, and major tech firms are also developing their own AI chips. This could reduce reliance on NVIDIA's products. However, Wall Street still expects NVIDIA to maintain its dominant position in the data center chip market.

4. Focus on the Chinese market In the outlook of the financial report, Nvidia's demand trend in China will become a focus, especially the increase in demand for H20. Key focus:

• Changes in customer interest since the launch of H20
• Facing domestic competitors, ( is mainly the competitiveness of Huawei ).
• B20(Blackwell Shrinked Version ) is scheduled for release in 2025.

5. Product Line Changes Due to the increased complexity of production, changes in the technical specifications and cooling methods of new products may affect NVIDIA's pricing power:

• The performance of the new A series is lower than the standard B100/B200, with an expected ASP between $25,000 and $30,000, lower than the previous $35,000 to $40,000.
• The GB200A Ultra NVL36 may use air cooling instead of liquid cooling, which may lead to a decrease in overall revenue.

This may have an uncertain impact on performance; on one hand, it may benefit revenue, while on the other hand, it may reduce pricing power.

6. Stock Price Fluctuation Due to the delay of Blackwell, challenges to AI narratives, and an overall market correction, NVIDIA fell 30% from its peak, but investors bought the dip, causing the stock price to rebound by 30%. Its current market capitalization is $3.18 trillion, making it the second largest in the world, just 7% shy of its historical high.

The current valuation is basically at the median level of the past three years. The price-to-earnings ratio is 47.6 times, which is relatively high, but due to maintaining high growth expectations, the PEG ratio remains one of the lowest among peers.

7. Bull and Bear Hypothesis Based on the current stock price of $124.58, Goldman Sachs has given a baseline expected stock price of $135, with optimistic scenarios rising 41% and 89%, and pessimistic scenarios falling 61% and 26%. At the current price level, potential