Source: Zhitong Finance

The US stock technology sector plummeted last night. The Nasdaq index fell 3.64%, the biggest one-day decline in more than 2 years. Among the major constituent stocks, Google, Microsoft, Meta, etc. fell 5.03%, 3.59%, and 5.61% respectively. Regardless of individual stocks or large markets, it can already be called a stock disaster when calculated from the perspective of decline alone.

Compared to the NASDAQ, the decline in the Dow was relatively light, and some constituent stocks are still rising. For example, Allied Pharmaceuticals, the largest constituent stock of the Dow Index, rose 0.91%, while Coca Cola reached a record high of 1.31%. Furthermore, in addition to Lilly and Novo Nordisk, which previously promoted diet pills to be too expensive, the pharmaceutical sector also recorded quite a few increases. For example, Gilead Medicine, which recently launched an anti-AIDS drug, rose 3.27%, and MSD, the king of K drugs, rose 1.24%.

The technology sector, led by the NASDAQ, almost fell like a stock disaster in a single day. What are the reasons and what are the signs? And what is the principle behind the Dow's resistance to falling and even reaching record highs with some traditional stocks? How should the future market view it?

1. Factors triggering the decline

On the face of it, the trigger for this sharp decline was that the performance of Google and Tesla's two stocks fell short of expectations, leading to market collapse.

However, from the author's point of view, the performance of these two major technology stocks is actually not bad. Google, in particular, had quarterly revenue of 84.7 billion US dollars in the second quarter, up 14% year on year; quarterly revenue from the cloud computing business exceeded 10 billion US dollars for the first time. Meanwhile, new features and new products are being introduced at a rapid pace. Waymo has made significant progress in the field of autonomous driving. In the field of AI, Gemini has gathered 1.5 million developers in half a year since its launch at the end of last year; Gemini itself has also launched more capable and efficient models.

Google's performance is the harshest point of criticism from the market. It is exactly the same point that was criticized by the market after the last quarter's Meta results. Basically, there is no need to change even the wording; that is, the capital expenditure invested in the AI field is too large. However, Google's management responded to this. In fact, this is also Google's consistent attitude. The risk of you not investing too much in the AI field is far higher than the risk of investing too much in the AI field. Of course, this is actually a to be or not to be question.

As far as Tesla's performance is concerned, the so-called sharp drop in stock prices falls short of expectations; rather, it is better to say that the previous stock price was speculated too high, and as soon as the results were good or bad, they all died. Specifically, for example, car sales in the second quarter were 0.444 million units. This figure was already known on July 1, but speculation was carried out according to favorable conditions. On July 1 and 2, Tesla's stock price rose 6% and 10%, respectively.

The delay in the release of the so-called Robotaxi is something we already knew a few days ago. As for gross margin and EPS falling short of expectations, in fact, Tesla's falling into a price war vortex is no longer news. None of the company's fundamentals have changed, and it is impossible for the fundamentals to suddenly improve in the few days when the stock price rises from 130 to 260. The only problem is that when the stock price was 130, all of the above were favorable; when the stock price was 260, all of these became negative.

This relates to the underlying factors behind this round of sharp decline: that is, after experiencing an increase that began in early November of last year, until the beginning of July this year, it has accumulated too large increases, and at the same time, expectations have been hit too high. At this point, even if your performance is in line with expectations, the market will sell on fact and make a profit; even if you exceed expectations, it will be difficult to rise even further. On the other hand, as long as it's slightly flawed, I'll do it in minutes without discussion.

This is the reason why even though Google and Tesla's performance declined in this round, the chip sector is also collectively straining. In other words, the chip sector also has the same logic. Expectations are too high, and even if the results meet expectations, they will be criticized, not to mention that if there is a slight problem, they are immediately punished by God.

Like Nvidia, the chip leader that has benefited the most from this round of AI, fell as high as 6.8% last night, even more than Google without any bad news. Meanwhile, second-tier leaders in the chip sector, such as Broadcom and AMD, fell 7.5% to 6%, respectively. TSMC fell 5.9%. Ultra-microcomputers fell 9%. By the time they were included in the NASDAQ 100, the highest point of 963, they had already fallen 26%, falling into a deep bear market. Meanwhile, Asmack, the leader in optical technology, dropped 6.44% last night after falling for three consecutive days, with a cumulative decline of up to 14%, which has reached this point.

2. Is there no warning?

As far as the warning is concerned, it has actually been repeated since May, but every time it appeared, it was selectively ignored by the market and investors. Until this time, it was finally impossible to ignore it anymore. In summary, there are two relatively large systemic warnings, as well as sporadic warnings for individual stocks.

The first sporadic warning was a sharp drop of 17% after Dell announced its results on May 30. At the time, some stocks in the chip sector also experienced a slight collapse, and the general market experienced a slight collapse. However, soon after TSMC's monthly production and sales data was released in early June, the market found new points of excitement and continued to be happy.

The first systematic warning appeared on June 20. On the same day, after Nvidia speculated to 140 US dollars/share, the top suddenly collapsed, and the price reversed and turned upside down, as if the “974 incident” on March 8 had reappeared. The chip sector then began a round of violent risk-off.

There was a deep pullback in some chip stocks in that round. For example, Broadcom took advantage of the strong wind where performance exceeded expectations and soared from below 1500 to 1845. After this round of correction at the top of the chip sector, the lowest drop was 1564, a drop of more than 15%. The sharp drop of 7% after Micron's performance on June 27 can also be counted as a small warning within the chip sector.

However, this wave of systemic warnings was once again ignored by the market as PCE fell short of expectations at the end of June, and expectations of interest rate cuts increased again. Ma Zhao runs, dances, and dances.

The second systemic warning was the release of CPI data on July 11. Prior to that, Federal Reserve Chairman Powell had loosened up, that is, there is no need to wait for inflation to fall to 2%; as long as the employment rate rises significantly, interest rates will be cut. However, the market and investors are used to using CPI, so after this CPI fell short of expectations on July 11, they were excited to cut interest rates.

It should be noted that the last CPI before interest rate cuts fell short of expectations. It can no longer be used as a benefit, but should be viewed as a disadvantage. Because interest rate cuts mean that the economy is not working, it is being pushed back, which means that the collective performance of listed companies will not be very good. As a result, on the day the CPI data came out, the stock market opened high and went low, forming a big negative line at the top.

Aware investors should consider how to handle their positions after the top of the market has been destroyed. But if it's big, they might be indifferent. But next, by July 17, Asmack's performance fell 11% after falling short of expectations. After TSMC's results fluctuated sharply on July 18, the day's high and low amplitude was as high as 4 percentage points or more. These are all sufficient hints that the market may be risk-off.

However, none of these are top votes, and investors still have reasons to continue selectively ignoring Ma Chao's running and dancing for photos or keep going. Until this time Google and Tesla, the problem was finally unavoidable, because these two companies are equal to the market itself. If they have a problem, it's like all stocks are in trouble.

Eventually, on this day, a stampede occurred within the day. Almost all blue-chip technology stocks collectively plummeted, and stocks ended in a disaster.

So in summary, in fact, there were sufficient warnings before this sharp fall, and alert investors should take precautions. Some people began to slowly cash out and gradually reduced their positions to take refuge; while others were immersed in the bubble and couldn't help themselves.

3. What to fry in the second half of the year?

It is not ruled out that there will be a retaliatory rebound in the short term, and it is undeniable that the revolutionary wave of AI is far from over. However, we must face the fact that after this round of sharp decline, there will be some changes in the trading logic of sectors such as AI, chips, and technology, which were previously believed in.

Prior to this round of decline, the valuations of many companies in the technology sector had already been priced in line with profit expectations for the full year of 2024, and some stocks were even in price in 2025. Furthermore, interest rates are still at 5.25, which does not support valuations that are too high. Therefore, it is no longer naive to think that the chip and technology sectors can rise forever.

The question we need to ask now is, which sectors will have systemic opportunities in the second half of the year? The author believes that there are four main lines worth paying attention to.

(1) Financial sector

The interest rate cut cycle generally favors bank stocks, especially systemically important banks such as Bank of America, J.P. Morgan Chase, HSBC, etc.

The darkest hour in the banking sector occurred in March of last year. At that time, the Bank of America's Silicon Valley exploded, while Credit Suisse went bankrupt in Europe and was bought by Credit Suisse, and it was once reported that Deutsche Bank was about to explode. The phantom of the financial tsunami surfaced. Fortunately, the Federal Reserve promptly stopped losses and provided unlimited liquidity to deal with the crisis. After surviving the cycle of interest rate cuts, the bank's good days are coming.

(2) Small to medium disk

Since Federal Reserve Chairman Powell clearly expressed “taking interest rate cuts into consideration” in his public speech, IWM, an ETF in the US stock market that tracks the small to medium capitalization index Russell 2000, has begun a runaway model. The reason is that small and medium capitalization stocks are far more sensitive to interest rates than capitalization stocks.

Use the A-share market as an analogy. In the 2016-17 interest rate hike cycle, the best performer was the Shanghai Stock Exchange 50. Entering the second half of 2018 and the 2019 interest rate cut cycle, the GEM index clearly outperformed the market.

Of course, for Chinese investors, they don't know much about small and medium capitalization stocks in the US market, so they can be held indirectly through some ETFs.

(3) Gold and treasury bonds

The US dollar weakened during the interest rate cut cycle, and gold is expected to strengthen in response. Gold ETFs have also risen markedly recently. However, since the price of gold has risen quite a bit before, reflecting expectations of interest rate cuts in advance, it is likely that it will fluctuate upward at a high level in the future.

The same goes for treasury bonds. The price of treasury bonds is inversely proportional to interest rates, and treasury bond yields will also follow the decline during the interest rate cut cycle, so treasury bond prices are expected to generally rise. Interestingly, the price of treasury bond ETFs (TLT) was hyped up at the beginning of the year. At that time, interest rate cuts were expected to be 5 to 6 times throughout the year, then with gradual falsification, interest rate cuts were expected to reach 3 times, now 2 times. Once interest rates fall substantially in the future, treasury bond prices will rise again.

(4) High-yield stocks

The high interest rate sector of Hong Kong stocks in the first half of the year was encouraging. Of course, there is also a high-interest sector in US stocks, and of course, the culmination of high-yield stocks is undoubtedly Berkshire Hathaway, the family of the elderly Buffett. Because Buffett's investment model is to buy, hold, and receive interest.

Therefore, it can be seen that after the Federal Reserve changed its tone, Berkshire Hathaway, whether it was A shares or B shares, began an 85° upward pattern. There has been a slight correction recently.

Also, as Philip Morrison, an established traditional tobacco leader, this is also a top high-yield stock. After the results were announced on July 22, Fimo continued to reach new highs. When the market and technology sector collapsed last night, Feimo actually reached new highs in a relaxed manner. Mount Tarzan collapsed and did not change its color. Currently, night trading continues to rise slightly.

The logic is also very clear, and it is completely consistent with the logic of the high-interest sector of Hong Kong stocks in the first half of the year: high dividends attract capital to buy, push up stock prices, and correspond to a decline in dividend rates, which matches interest rates.

4. Summary

In summary, the US stock market in the second half of the year will be very different from the first half. As the pace of interest rate cuts gets closer, concerns about the US recession will loom over the stock market. Previously, valuations were speculated to the chip technology sector, which was too expensive under AI beliefs, making it difficult to reach new highs.

On the contrary, the interest rate cut cycle has always favored banks, treasury bonds, gold, high-interest sectors, and small to medium markets, so these are expected to become new hot spots for US stock trading in the second half of the year.

Furthermore, the Democratic Party leader, current US President Joe Biden, will no longer participate in the US presidential race next November, and Vice President Harris (He Jinli) was nominated as a candidate by the Democratic Party. In order to counter Trump, the Democratic Party will also come up with some aggressive or even controversial policies, so the black swan incident is likely to occur frequently in the US stock market in the second half of the year, and we should also prevent it.

edit/lambor