Since October, the Dow Jones Industrial Average and the S&P 500 have been setting new historical highs, and the Nasdaq Composite is also close to its historical peak on July 11th. With the release of earnings reports from tech giants this quarter, the U.S. stock market is expected to continue reaching new highs.

On one hand, from a macroeconomic perspective, U.S. employment and consumer data for September continue to maintain a high growth rate, while inflation data continues to trend downward, further strengthening the expectation of a soft landing. On the other hand, the better-than-expected earnings reports from some tech giants have made the market more optimistic, with a high proportion of earnings reports exceeding expectations supporting the indices at higher valuations. In November, the Federal Reserve is expected to maintain a rate cut of 25 basis points, and the December interest rate meeting implies a rate cut of 25 basis points as well. Therefore, the trend of rate cuts is expected to continue throughout the year without being affected by economic overheating, and the continuation of the rate cut cycle combined with a soft economic landing will support U.S. stocks in maintaining a higher valuation range.

The current expectation of a soft landing for the U.S. economy continues to strengthen, and the performance growth of tech giants announced this quarter is robust. From a valuation perspective, the three major stock indices are at a level slightly above the median, and the market may have already factored in the trend of rate cuts into stock prices. Under the expectation of performance growth, the valuation level is at a reasonable and slightly higher level. We believe that U.S. stocks are likely to maintain a trend of fluctuating upward movement, and we recommend paying attention to the Nasdaq ETF (513300) and the S&P ETF (159655).

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1. Macroeconomic data remains favorable

U.S. high-frequency consumer data rebound; initial claims fall; mortgage rates rise slightly, and the U.S. ten-year Treasury rate increase reflects the current strong economic fundamentals.

In terms of consumption, the Nowcast of real personal consumption increased slightly to 3.6% from the previous week, with strong retail data, including a year-over-year retail sales growth of 1.7%, compared to the previous value of 2.2%, and a month-over-month increase of 0.4%, higher than the consensus expectation of 0.35%, with the previous value at 0.06%; the control group's retail sales increased by 0.71% month-over-month, higher than the consensus expectation of 0.3%, with the previous value at 0.3%. In the job market, the latest week's initial claims fell from 258,000 in the previous week to 241,000, lower than the expected 258,000, indicating that the impact of hurricanes on U.S. employment may gradually recede; in addition, high-frequency data shows a slight rebound in job vacancies. In the real estate sector, the 30-year fixed-rate mortgage rate rebounded to 6.44%. Overall, the continuous release of macroeconomic data in recent times has further increased the probability of a soft landing for the U.S. economy, and the recession trade expectations that previously troubled U.S. stocks have been reduced to a lower probability.

2. Tech giants' performance exceeds expectations

It is expected that 20% of the S&P 500 index constituent companies will release their earnings reports this quarter. In the AI sector, TSMC and Netflix, which have already released their earnings reports, both exceeded market expectations and surged to historical highs, with Tesla's earnings release leading to a more than 20% increase after the market closed.

In this round of the U.S. stock market, AI tech giants have frequently set new highs recently. After some companies in the industry chain released their performance, the market updated its outlook on earnings growth for this year and next year. We believe that this round of AI technology innovation will continue to drive the growth of corporate earnings among listed companies. TSMC's revenue for FY24Q3 was $23.5 billion, exceeding the Bloomberg consensus expectation of $23.3 billion; the gross margin was 57.8%, exceeding the Bloomberg consensus expectation of 54.8%. Looking at the process breakdown, 3-nanometer shipments accounted for 20% of total wafer revenue; 5-nanometer accounted for 32%, and 7-nanometer accounted for 17%. TSMC stated that strong demand for smartphones and AI-related products has driven the overall utilization rate of 3-nanometer and 5-nanometer process technologies; it is expected that the revenue contribution from server AI chips will increase more than threefold this year and account for about 15% of total revenue in 2024. In terms of CoWoS business, although the company expects CoWoS capacity to double next year, it still cannot meet market demand. The company's guidance indicates that it expects the median revenue for the fourth quarter to be $26.5 billion; it expects the fourth quarter gross margin to be between 57% and 59%; the operating profit margin is expected to be between 46.5% and 48.5%.As of now, 52 S&P 500 constituent stocks have disclosed their Q3 reports, with 60% of the companies outperforming expectations, and the combined net profit exceeding expectations by 7.4%. From an overall perspective, the probability of upward revisions for S&P constituent stocks remains high, which will continue to support the high valuation range of U.S. stocks.

3. Current stock index valuations are slightly above the median

The EPS expectations for major U.S. stock indices are still being revised upwards, but the slope has decreased. This week, the dynamic F12M EPS expectations for S&P 500 constituent stocks rose by 0.1%. Profit expectations for 16 industries increased, while 5 industries saw a decrease, and 3 industries remained essentially unchanged. Industries with upward revisions: Diversified Financials (+0.8%), Semiconductor Products and Equipment (+0.7%), Media and Entertainment (+0.6%), Banks (+0.5%), Materials (+0.5%); Industries with downward revisions: Capital Goods (-1.2%), Health Care Equipment and Services (-1.1%), Energy (-0.5%), Automobiles and Auto Parts (-0.3%), Food and Staples Retailing (-0.1%). In terms of static valuation, the valuation levels of the three major indices are slightly above the median.

Investment advice and future outlook:

We maintain a view of fluctuating upward movement for the U.S. technology sector. Driven by the optimistic sentiment of U.S. stock investors, there is still room for U.S. stocks to rise. However, considering that the dynamic PE of the S&P 500 has expanded to over 23 times, approaching the level of twice the historical mean standard deviation, and the Nasdaq Index's dynamic PE exceeds 43 times, we believe that there is a scenario for periodic fluctuations in U.S. stocks.

Related products:

1. The Nasdaq ETF (513300) is an ETF (Exchange-Traded Fund) product focused on investment opportunities in U.S. stocks. It tracks the Nasdaq 100 Index (index code: NDX.GI), which selects 100 non-financial stocks listed on the Nasdaq exchange as its constituents. The index is calculated based on market capitalization weighting and corresponding index compilation rules, reflecting the overall Nasdaq market or the trend of high-tech in the United States.

2. The S&P ETF (159655) tracks the S&P 500 Index (code: SPX.GI), whose constituents are selected from the S&P Total Market Index and are widely considered a representative index of the U.S. large-cap stock market. The index includes 500 outstanding U.S. listed companies with a balanced industry distribution, with Information Technology accounting for 41.93%, Consumer Discretionary and Health Care each accounting for 11.7% and 10.2% respectively, and Finance, Industrials, and Consumer Staples each having a certain proportion.