After experiencing a strong rally this year, the S&amp;P 500 index has accumulated a gain of nearly 20%, while the Nasdaq has risen by 35%.
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Despite the soaring U.S. stock market, the bears have been repeatedly proven wrong. Both Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, and Michael Burry, founder of Scion Asset Management, have admitted to misjudging the market situation.
The tightening cycle of the Federal Reserve is not yet over, and the banking crisis during this period has stirred up market sentiment, with recession fears looming. So why is the U.S. stock market still relentlessly moving upwards?
Some believe that the Federal Reserve's thirteen-year period of zero interest rates and ultra-loose monetary policy has led to the current frenzy. Is this really the case?
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From March to May, the Federal Reserve's balance sheet expanded by nearly $400 billion to support uninsured bank deposits.
Although this move is not entirely quantitative easing - as it involves lending to banks rather than purchasing their securities, thus not actually creating new funds - it looks very much like quantitative easing during this period.
The banking crisis has now subsided, and the Federal Reserve's balance sheet reduction is making a comeback. However, under the wave of investment in artificial intelligence, technology stocks have skyrocketed, driving the overall U.S. stock market.
According to Berenberg, a German investment bank, as a result, the U.S. stock market appears to be very expensive in terms of both absolute and relative value. The expected price-to-earnings ratio for U.S. stocks is 20 times, while the global stock market's expected price-to-earnings ratio is 14 times.
Previously, the U.S. stock market has only surpassed the 20 times mark twice, and both times were during periods of excess liquidity-induced bubbles.
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Regarding this, Morgan Stanley analyst Andrew Sheets stated:
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The overall rise in global and U.S. stocks is due to an increase in valuations, and it has reached an unusual level.
In the past 25 years, we have only seen two instances of multiple increases from the beginning of the year to the present - in 2009 and 2020, respectively. Both of these years experienced deep recessions and large-scale easing policies, which supported the view that valuations should expand before the eventual long-term rebound. However, this cannot explain the situation in 2023.
</blockquote>
It is also worth noting that earnings prospects for U.S. stocks are not optimistic. Except for the seven large technology companies, earnings expectations for all other companies have seen significant declines.
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Now, with the continuous cooling of inflation, deflation will be the market's biggest concern, at least for companies that aim to achieve excess profits in the post-pandemic era.
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The cooling of inflation means that demand will decrease, so companies' sales may disappoint investors, and operating profit margins will also decline.
As one-fifth of US companies have released their second-quarter results, the number of downward profit revisions has exceeded the number of upward revisions. And the downward revisions are mainly concentrated in the consumer services, household and personal products, and capital goods sectors. It is evident that greedy inflation (high corporate profits leading to persistently high inflation) has eased.
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In addition, official data shows that US CPI rose 3% year-on-year in June, the lowest since March 2021; core CPI hit the lowest level since October 2021.
The unexpectedly slow inflation has led many market participants to believe that the rate hike is coming to an end. The market mostly expects the Federal Reserve to raise interest rates by 25 basis points on Thursday, and this will also be the last rate hike of the year.

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