On June 30th, the United States released the latest May Personal Consumption Expenditures (PCE) Price Index, which hit a nearly two-year low. The market celebrated the cooling of inflation, and the NASDAQ (NASDAQ Composite Index) saw gains on the day, throughout the week, and for the entire month. The first half of the year witnessed a remarkable surge, with the index recording a growth of over 30%, marking the largest first-half gain in the past two decades.

Before analyzing the potential trends of the NASDAQ in the second half of the year, let's review the trajectory of this recent surge. On February 16th of this year, the NASDAQ briefly broke through its consolidation range. At the same time, the yield on the 10-year U.S. Treasury bonds, which serves as a global benchmark for asset prices, reached 3.8%. The market was brewing concerns about interest rate hikes and monetary tightening, leading to a downward adjustment of stock valuations and a subsequent decline in the NASDAQ. Moreover, against the backdrop of falling bond prices (rising yields), the Silicon Valley Bank and Credit Suisse experienced bankruptcy crises.

Market concerns began to mount, raising worries of a second financial crisis similar to the one in 2008. Investors flocked to buy U.S. Treasury bonds as a safe haven, causing bond prices to rise and yields to plummet. According to the Chicago Mercantile Exchange's (CME) FedWatch Tool, market expectations not only foresaw a pause in interest rate hikes but went to the extreme of anticipating rate cuts by the Federal Reserve starting in July. It seemed that the Federal Reserve also felt the pressure, as it was initially expected to raise rates by 50 basis points during the March 22nd rate meeting but eventually settled for a 25-basis-point increase.

From that point until the Federal Reserve's rate meeting on June 14th, market expectations for a rate cut by the end of the year remained unchanged, regardless of the state of economic data. The yield on the 10-year U.S. Treasury bonds fluctuated between 3.3% and 3.7% during this period. In other words, prior to the outbreak of the third phase driven by NVIDIA in the artificial intelligence sector, there were already indications of excessive concerns by the Federal Reserve and the market regarding a banking crisis. This collectively formed an environment of loose monetary conditions, fueled by expectations of interest rate cuts.

Analysis of the NASDAQ's Outlook in the Second Half of the Year

The factors influencing stock price movements primarily consist of valuation adjustments and profit expectations. As described earlier, the upward trend of the NASDAQ was initially driven by the decline in U.S. Treasury yields (expectations of rate cuts), which in turn led to a recovery in valuations. Subsequently, the narrative shifted to the anticipation of significant profit growth from artificial intelligence-related products and applications.

First and foremost, after the Federal Reserve's interest rate meeting on June 14th, the market no longer expects rate cuts this year. The yield on the 10-year U.S. Treasury bonds has also risen to 3.7% to 3.8%, indicating a tightening financial environment. Additionally, as we approach the second quarter earnings season in July, the market will assess actual profitability based on profit expectations. However, the benefits brought by artificial intelligence may not be immediately reflected in the financial reports, and NVIDIA, which contributes significantly to actual revenue, is currently facing a policy storm as the U.S. Department of Commerce is considering another ban on high-end chips.

Furthermore, the actual personal consumption expenditure for May, as published by the United States, declined from 0.2% (previously adjusted to 0.5%) to 0%. Consumption expenditure, which accounts for three-quarters of economic activity in the United States, showed a clear downward trend after a rebound in January this year. The last time such a significant decline was observed was in November last year (0.5% in October, 0% in November, and -0.3% in December), when demand plummeted, forcing companies to adjust product prices. It was also during that period that core goods inflation saw a noticeable decline. Therefore, if the decline in consumption expenditure continues into June and July, we can anticipate the resurgence of a second round of declining commodity prices, which will inevitably impact corporate profits, putting stock prices at risk of adjustment.

In summary, based on the aforementioned analysis, the prolonged expectation of rate cuts in the first half of the year created a relatively loose financial environment, releasing the valuation pressure on the U.S. stock market and raising profit expectations due to the artificial intelligence theme. However, these favorable conditions are gradually dissipating, and the third quarter of the year could see increased downward pressure, casting a less optimistic outlook for the NASDAQ.

It is important to note that a potential recovery may occur in the post-fourth quarter, as current consumer spending declines are accompanied by an increase in savings. If subsequent inflation aligns with expectations and the anticipation of rate cuts resurfaces, we may witness a rebound in consumer spending and savings demand, driving the recovery of corporate profits.

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