After the release of the US CPI, the market is "euphoric," wildly chasing high-risk assets

The moderate CPI inflation in the U.S. report has alleviated investors' concerns about stagflation, paving the way for the Federal Reserve to cut interest rates, leading global investors to aggressively buy the riskiest assets. From tech giants to small-cap stocks, from emerging markets to cryptocurrencies, almost all categories of risk assets have shown strong upward momentum. The S&P 500 index has returned to historical highs, with small-cap stocks, emerging markets, and the semiconductor sector continuing their upward trend. Despite the threat of Trump's tariff policy potentially disrupting global trade, the market volatility index has still dropped significantly. Ethereum has surged 55% in the past month, while Meme stocks have also regained popularity. Market sentiment turns highly optimistic, tariff concerns fade “Market sentiment is surprisingly bullish, almost a ‘tariffs? Who cares?’ attitude,” said Neil Birrell, Chief Investment Officer at Premier Miton Investors. “The market seems to have detached from economic reality, with the stock market filled with optimism or excitement.” Since the low in April, the S&P 500 index has soared nearly 30%—when Trump's trade shocks triggered a sell-off of U.S. assets. The index has risen nearly 12% since Trump won the election last November. Traders currently expect about a 90% probability of a rate cut by the Federal Reserve in September, with some traders even betting on a larger cut. U.S. Treasury Secretary Scott Bessent stated in an interview on Tuesday that the Federal Reserve should be open to a larger cut of 50 basis points that may occur next month. Volatility index drops significantly, market confidence strengthens Another clear sign of market confidence is that the volatility index has dropped significantly. The VIX fear index has fallen to its lowest level since December, and the MOVE index, which measures bond market volatility, is at its lowest level since 2022. The implied price volatility indicator in the foreign exchange market has also dropped to its lowest level in a year. “I do see a lot of potential risks that could impact market sentiment and expectations. But I don’t think the market is currently behaving irrationally. We have a long way to go before the market becomes irrational,” said Bernard Ahkong, Chief Investment Officer of UBS O’Connor Global Multi-Strategy Alpha, in a media interview. “The cost of shorting is very high right now.” Tech giants lead the market, driving strong earnings growth In the stock market, sentiment has shifted from concerns about a trade-induced recession in April to direct optimism about economic resilience, moderate inflation, and potential rate cuts. The renewed excitement in the field of artificial intelligence has once again propelled tech giants to lead the market. The so-called “Mag 7” tech stocks (including Nvidia and Microsoft) have risen nearly 50% since early April, after experiencing declines in the first quarter According to analysis by Deutsche Bank strategists, this is mainly attributed to strong earnings performance, which alleviated market concerns about these companies' excessive spending in the field of artificial intelligence. Large tech stocks almost single-handedly drove earnings growth in the second quarter, accounting for 90% of the overall profit growth of the S&P 500 index. Investor Sentiment Spreads to Higher-Risk Areas This optimism has even spread to the highest-risk areas of the U.S. stock market. The Russell 2000 index, composed of small-cap stocks (which are more sensitive to interest rates than large-cap stocks), is expected to rise for the fourth consecutive month. The extreme volatility in the stock market this year has triggered a frenzied response from Wall Street strategists, who have generally struggled to keep up with the sharp decline in April and the subsequent recovery. Morgan Stanley's Michael Wilson and former Wells Fargo strategist Chris Harvey are among the few who remained calm during the turmoil in April and were ultimately proven correct in their predictions. Although Wilson warned that the S&P 500 index could decline further in the short term, he maintains a positive outlook for the 12-month target and has been advising clients to buy on dips since May. In contrast, strategists from banks like Goldman Sachs and Citigroup have performed poorly. They hastily lowered targets after trade announcements, but returned to a bullish outlook as Trump paused significant tariffs and earnings performance remained strong. Wall Street forecasters have now become more optimistic. Citigroup strategist Scott Chronert raised the S&P 500 index year-end target again this month, partly because he expects tax cuts to offset the impact of tariffs. Despite positive investor sentiment, positioning data shows that their stock allocations have not become overly stretched