The core reason is very clear: despite facing various economic challenges, the US stock market has shown extremely strong resilience. S& The profits of companies in the P500 index have maintained steady growth, exceeding market expectations, which sends a positive signal to the market

The core reason is very clear: despite facing various economic challenges, the US stock market has shown extremely strong resilience. S& The profits of companies in the P500 index have maintained steady growth, exceeding market expectations, which sends a positive signal to the market. So far, we have not seen any large-scale economic recession or obvious signs of economic slowdown. The market has pre adjusted for possible inflation scenarios. In addition, the Federal Reserve has clearly stated that it will suspend interest rate hikes after November, which will inject a shot in the arm into the stock market, especially before the end of the year.

Although the macroeconomic environment remains unstable, major stock indices have successfully broken through trading ranges, indicating that investors' risk appetite is gradually recovering. Meanwhile, thanks to support from ThreeArrows and FTX, the cryptocurrency market has also become more popular.

As the macroeconomic outlook gradually becomes clearer, Bitcoin prices have rebounded by 40% from their lows. As inflation discussions gradually fade, investors' attention has once again shifted to the fields of high growth stocks and artificial intelligence. As the economic situation stabilizes further, I firmly believe that Bitcoin prices still have the potential to rise.

US stocks: continue to rise

The US stock market continues to rise, while Bitcoin prices have remained relatively stable in the past few months. Although no significant economic data has been released recently, existing data indicates that the US economy still exhibits strong resilience in the current high interest rate environment. Although we have not seen astonishing economic growth, there are also no signs of imminent severe economic recession or large-scale market retreat. The estimated GDP growth in the third quarter exceeded 3%, exceeding the Atlanta Fed's forecast.

Against the backdrop of economic recovery, 2022 witnessed a rebound in productivity, which will help alleviate the impact of slower recruitment rates. Although employment growth has slowed down, we have not yet seen any serious employment problems.

However, I personally believe that a high interest rate environment may last for a period of time, but I don't quite understand why the Federal Reserve is still considering further interest rate hikes. Although the market predicts that the Federal Reserve may raise interest rates again in November, I have not yet seen sufficient reasons to support this view. The recent inflation report shows that inflation pressure is slightly higher, but mainly due to the rise in oil and energy prices. The core inflation index is expected to gradually improve, and the downward trend of annual inflation rate will continue.

The Federal Reserve seems to have begun to recognize the economic risks that continuing to raise interest rates may bring, such as a decrease in bank loans, an increase in overdue rates for car loans, instability in the commercial real estate market, and potential troubles for consumers from the resumption of interest rates on student loans. However, so far, it seems that these risks have not caused substantial damage to the economy, and the data still shows that our economic condition is good.

S& P500: Growing Preference for Growth Stocks

Recently, we can observe a significant increase in the S&P 500 index's preference for growth stocks. This trend is particularly evident in the current high interest rate environment. Compared to defensive and cyclical stocks, seven growth technology companies such as Apple, Google's parent company Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla may receive higher market value estimates.

Interestingly, before interest rates began to rise, growth companies had already extended their debt maturities in advance to ensure they could lock in historically low interest rates. In addition, the cash to total debt ratio of companies in the S&P 500 index is still relatively high, with a growth company ratio of 53%, while cyclical and defensive companies are 28% and 14%, respectively. This means that if interest rates remain high for a period of time, growth companies may receive more interest income.

Looking back at 2022, the sharp rise in interest rates has led to a general decline in P/E ratios, especially for growth stocks. However, this year we have seen that despite sustained high interest rates, the P/E ratio is expanding. An in-depth analysis of fundamental data indicates that the P/E ratio of growth stocks may continue to expand compared to cyclical and defensive stocks.

Looking ahead, the average interest rate is expected to be higher than the level after the financial crisis. This may lead to an increase in interest expenses and have a negative impact on the profitability of companies in the S&P 500 index. However, the practice of growth companies postponing their debt maturity dates in 2020 helped limit losses at the new normal interest rate level. Given the significant differences in leverage ratios between different companies, defensive and cyclical stocks may be more impacted by relatively high debt levels. Therefore, the relationship between the valuation of growth stocks and interest rates may be more complex than most people imagine.

Macro perspective: August CPI and future prospects

The core CPI rose again in August, after several months of deceleration. Part of the reason is the significant increase in air ticket prices, as well as the increase in core service prices (excluding rent) and non housing prices. Although some predict a slight increase in core PCE inflation, detailed PPI data suggests that commodity prices may rise again. However, the Federal Reserve may stick to its plan, and I believe they may raise interest rates by 25 basis points in November. This is in line with our sustained and stable growth and slightly above target inflation rate. There may be a period of high interest rates, which is related to sticky inflation and may lead to price increases. The Atlanta Fed's wage tracker shows a slight decrease in wages, but still supports the 2% inflation target. The risks include the possibility of union negotiations leading to an increase in labor costs, as well as the possibility of government shutdown if Congress fails to take action.

Economic growth seems to be diversifying in multiple fields, shifting from service spending to more consumer goods, commercial investment, and residential investment. Despite a slight decline in manufacturing output, low unemployment claims and moderate industrial production growth indicate strong economic performance.

The upcoming Federal Open Market Committee meeting and real estate data will become the focus of attention. Given the recent stabilization of inflation and weak signs in the labor market, the Federal Reserve may maintain stability in policy interest rates. Their predictions may indicate a decrease in GDP growth and unemployment expectations in 2023. The forecast for core PCE may also be lowered. Although the number of housing starts is expected to increase due to tight supply, high interest rates and housing prices may pose constraints on growth.

The labor market shows some signs of relaxation, such as a slight decrease in the ratio of job vacancies to unemployment, and a slight increase in the unemployment rate. However, labor demand remains strong, making it more likely to achieve normalization while maintaining wage growth levels of over 4%.

The Atlanta Fed's salary tracker also confirms the trend of slowing wage growth. There seems to be a certain correlation between sticky inflation and sticky labor costs. The upcoming auto union negotiations are crucial for future price inflation. In addition, the rapid growth of the ISM service industry may reflect an increase in energy costs. However, it is expected that due to strong and widespread growth in consumer spending, GDP will perform strongly in the third quarter.

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