To The Moon

Recently, the US stock market has experienced significant volatility, primarily due to the government shutdown caused by the debt ceiling impasse and the new round of intensified US-China trade tensions initiated by the Trump administration. This led to a sharp decline in global risk assets. The Nasdaq index, dominated by technology stocks, once fell more than 3.5%, while market risk aversion notably increased, with both gold prices and US Treasury yields rising. On October 10, the volatility index (VIX), reflecting market panic, surged to 21.66, indicating a tense market atmosphere.

From a valuation perspective, US stocks are generally overvalued, especially Nasdaq tech stocks, whose valuations have exceeded levels before the tariff hike in April this year. For example, the "FAANG" tech giants now trade at a price-earnings ratio of 31.3, higher than approximately 26.8 in April. Market concerns over a valuation bubble have subsequently increased.

Despite many uncertainties, it is believed that the current US bull market has not collapsed, supported by three key reasons for continued market ascent.

The impact of the US-China trade friction escalation is short-term.

On the evening of October 10, Trump threatened to impose a 100% tariff on all Chinese products starting November 1, along with export controls on key software, triggering significant global market turbulence. On October 14, China retaliated by targeting five US subsidiaries under Hanwha Ocean Company, reigniting market fears. The US stock market opened with a gap down but gradually narrowed losses.

This tariff escalation and trade conflict are assessed as temporary, with panic expected to gradually subside after the initial shock. The magnitude of market disturbance is forecasted to be less severe than the market reaction to the initial tariff hikes in April. This is mainly because the escalation is a Chinese countermeasure to a series of US restrictions. Since the US-China Madrid economic and trade talks in September, the US has continuously imposed more restriction measures, including placing many Chinese companies on export controls and entity lists. On October 14, the US levied port fees on certain Chinese ships, and China simultaneously tightened rare earth export controls and imposed port fees on US ships as retaliation.

The US cannot bear extremely high tariff burdens, while China's tariff impact is relatively limited. If Trump implements a 100% tariff, the effective US tariff rate would rise from 16-17% to over 20%, pushing inflationary pressure higher and exacerbating an already weak US employment market. The Federal Reserve had already cut interest rates in September to mitigate economic downturn risks. China’s export diversification and complete industrial system mean that although exports to the US dropped 15.5%, exports to other regions increased significantly, with total exports still growing 5.9% year-on-year.

The US government shutdown has entered its 11th day, with intense political confrontation between Republicans and Democrats. The Trump administration is reluctant to cause further political trouble. Since October 10, seven federal agencies have begun layoffs, with over 4,000 civil servants furloughed, gradually showing negative economic effects. Compared to the tariff hike in April, the Trump administration now faces greater policy constraints, making the 100% tariff threat more symbolic, with actual comprehensive implementation highly unlikely. It is expected that negotiations will eventually ease tensions.

In summary, although the trade situation remains tense, due to multiple constraining factors, this round of tariff escalation mostly stays at a psychological level, with short-lived market panic and limited impact.

Easing liquidity environment continues to support US stocks.

The government shutdown has indeed affected the overall economy in October, especially consumption. The Congressional Budget Office estimates about 750,000 government employees are affected daily, temporarily furloughed without pay. While back pay will be issued later, government payrolls have decreased by about $400 million daily in the short term, pressuring consumption.

However, economic growth and stock market performance do not necessarily move in sync. Historical experience shows that continuous Federal Reserve accommodative monetary policy tends to support the stock market. Even if economic growth slows, the stock market may still rise unless a significant recession occurs. During the 2020 COVID-19 pandemic, supply chain disruptions caused temporary economic slowdown, but Fed rate cuts and fiscal stimulus quickly lifted the US stock market after a brief adjustment.

The Federal Reserve resumed rate cuts in September, signaling looser monetary policy. Since the government shutdown on October 1, key employment and inflation data releases have paused, making Fed guidance unclear. However, market consensus expects a 96% probability of another rate cut at the end of October, further reinforcing capital inflows into stocks as a major support.

Graphs of Nasdaq index and 10-year Treasury yields show that under a low interest rate environment, the stock market remains in an upward trend, consistent with historical patterns of falling rates and rising tech stocks.

Technological innovation, especially AI, drives market gains.

Whether in US or China A-shares, rapid development in technology innovation, particularly artificial intelligence, has become a core driver of stock market gains. On October 13, tech stocks staged a strong rebound, with the Nasdaq and S&P recording their biggest single-day gains in four and a half months. Chip manufacturer Broadcom benefited from a major partnership with OpenAI, leading the semiconductor sector’s rally.

The US is catching up fast with China in AI and other core industries. On the same day, JPMorgan announced plans to invest about $1.5 trillion over the next decade, focusing on supply chains, advanced manufacturing, defense aerospace, energy independence, and frontier technologies including AI and quantum computing. This demonstrates America’s push to revitalize its industrial base and strengthen national security and technological leadership.

Google revealed plans to invest $9 billion over coming years to expand its cloud computing and AI data center in South Carolina. Intel's $32 billion chip factory in Arizona has already started mass production, highlighting America’s ambition in advanced manufacturing.

Investment strategy advice: seize the medium-term upward trend while properly hedging risks.

Despite bubble risks in the tech sector and short-term market adjustment pressure, as long as the Fed does not tighten monetary policy or cause liquidity crises, the US stock bubble remains intact.

Investors should pay attention to these points:

• Understand that current tariff escalation is mostly psychological; the market is expected to stabilize after short-term adjustments.

• The accommodative monetary policy environment and technological innovation remain the core supports for US stocks.

• Use derivatives such as micro E-mini Nasdaq 100 futures to hedge risks, managing volatility while maintaining equity positions.

• Focus on the technology innovation sector, especially AI-related stocks, as long-term growth drivers.

In conclusion, although the US stock market faces many challenges, multiple factors collectively support the continuation of the bull market. Investors can make steady portfolios under controlled risk, persistently capturing the medium-term upward trend.

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