To The Moon

I. Performance of Global Equity Indices (in US Dollar)

Source: Bloomberg, Tiger Brokers

Key Highlights

◼ Last week, Chair Powell openly noted that U.S. equity valuations appear stretched, triggering a short-term pullback. Nonetheless, macro fundamentals and earnings continue to provide a floor. Q2 GDP was revised up to 3.8%, while August core PCE came in at 2.9% YoY—evidence of economic resilience and contained inflation. Labor market cooling has had limited impact in the context of a rate-cutting cycle, allowing the “Goldilocks” narrative to persist. Consumption remains broadly stable but increasingly reliant on high-income households, with weak sentiment among low-income families posing medium-term risks. On the earnings side, demand from AI continues to drive recovery, with S&P 500 EPS expectations rising to 10.8%, alleviating valuation pressures. Interest-rate dynamics remain the key variable. At the same time, rising policy uncertainty under the Trump administration—new tariffs and interventions in Fed independence—has raised concerns, but direct involvement in semiconductors and key energy sectors also presents structural opportunities.

◼ In Greater China, markets came under pressure last week, with both the Hang Seng Index and Hang Seng Tech Index down nearly 2%. Short-term volatility, however, has not altered the medium-term logic of the AI value chain. At its Cloud Summit, Alibaba projected a tenfold increase in energy consumption over the next decade, underscoring its commitment to capacity expansion. Yet AI alone has limited pull-through to the broader economy, and sustained market gains will still depend on policy support and macro improvement. Our view remains: caution in the short term, policy focus in the medium term, and earnings as the ultimate driver in the long run.

◼ This week’s key focus will be U.S. September nonfarm payrolls and unemployment rate, as well as ISM PMI and other macro data.

II. Key Market Themes

U.S. Equities: Despite Valuation Pressure, the Goldilocks Story Holds

Last week, Fed Chair Powell stated that “by multiple measures, U.S. equity valuations are elevated,” which briefly triggered a market pullback. However, from both macro and earnings perspectives, we believe there is still a lack of a clear catalyst for a rapid valuation compression. On the macro side, U.S. Q2 real GDP growth was revised up to an annualized 3.8%, well above the prior 3.3% estimate, with upward revisions to consumer spending as the main driver. Meanwhile, August core PCE rose 0.2% MoM and 2.9% YoY, broadly in line with expectations—indicating that while price pressures have edged up, inflation remains manageable.

Overall, the U.S. economy continues to demonstrate resilience. Signs of labor market cooling have so far had limited impact on demand thanks to cushioning from the rate-cut cycle. Despite concerns over liquidity conditions, the “Goldilocks” narrative remains largely intact. That said, consumption patterns show structural vulnerabilities: roughly 65% of incremental Q2 consumption came from high-income households’ wealth effect, while the University of Michigan survey shows low-income household confidence has fallen to its second-lowest level this century, casting doubts on the sustainability of consumption in the medium term.

Source: Bloomberg, federalreserve.gov

On the earnings front, continued recovery is providing crucial support. AI-driven demand has boosted profits at leading tech firms, with the “Magnificent Seven” contributing over half of the S&P 500’s quarterly net income growth. As a result, earnings expectations have been revised upward, with 2024 S&P 500 EPS growth now forecast at 10.8%, up from 9% at the end of Q2, helping to offset valuation pressures. Meanwhile, interest rates remain a key variable: a drop in the 10-year Treasury yield below 3.8% could reignite recession fears, while a breakout above 4.8% would imply a return of long-term inflation and term premium. Either extreme could overturn the current “Goldilocks” narrative and serve as a trigger for valuation adjustment.

Beyond the macro backdrop, unconventional moves by the Trump administration continue to shape market expectations, creating both risks and opportunities. On the risk side, policy surprises and heightened uncertainty are particularly notable. Last week, Trump abruptly announced a new round of tariffs on certain imported goods starting October 1, covering originator pharmaceuticals, heavy trucks, kitchen cabinets, and furniture, with varying tax rates. In addition, Trump suggested via social media that he may consider dismissing Powell, once again raising questions over the Fed’s independence. Such policy noise and uncertainty complicate market pricing and have become an important source of risk premium.

At the same time, direct government intervention in key industries is opening up new investment opportunities. Intel, in which the government holds a stake, reportedly attracted potential collaboration interest from Apple and TSMC last week, underscoring the acceleration of semiconductor localization and the “Made in America” strategy. Similarly, market rumors indicated that the Trump administration is in talks to acquire around a 10% stake in a restructured Lithium Americas, aiming to secure upstream resources for the EV and energy storage supply chain. In our view, this trend toward quasi-“nationalization” of strategic sectors in the U.S. is likely to persist over the next 1–2 years, with pure-play American companies in semiconductors, rare earths, and new energy metals standing out as key beneficiaries.

In Greater China, external and internal pressures drove heightened volatility last week, with both the Hang Seng Index and Hang Seng Tech Index declining nearly 2%. However, we believe short-term disruptions have not altered the medium-term logic of AI and the broader tech value chain, as domestic AI investment continues to accelerate. At its annual Cloud Summit last week, Alibaba announced a target of a tenfold increase in data center energy consumption over the next decade, underscoring its long-term commitment to expanding computing power. That said, technology acceleration alone is insufficient: according to Morgan Stanley estimates, AI will contribute only about 0.2%–0.3% to China’s GDP over the next two years. Thus, for equities to sustain a steady upward trajectory, stronger policy stimulus and macro improvement remain essential. In this regard, our view remains unchanged: caution in the short term, focus on policy in the medium term, and earnings as the long-term anchor.

Source: Bloomberg, Tiger Brokers

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