资料来源：FactSet，中金公司研究部With the US election concluded, the Trump trade continuing to heat up, and the US stock market repeatedly hitting new highs, the performance of the US stock market in the third quarter has also been fully disclosed.
With the US election concluded, the Trump trade continuing to heat up, and the US stock market repeatedly hitting new highs, the performance of the US stock market in the third quarter has also been fully disclosed. From a performance perspective, although the Technology Industry remains strong, the overall growth of the US stock market has declined due to the cyclical industry dragging it down, and the market's consensus earnings expectations have also been downgraded. However, this has not affected market performance; the US stock market has not only hit new highs repeatedly, but even the strong and weak relationships among industries are 'counterintuitive' to the performance situation mentioned above, with the cyclical-style Dow Jones even temporarily outperforming the growth-style Nasdaq. The main reason for this, we believe, is mainly due to the Trump trade that has heated up after the election. Against the backdrop of significantly rising US Treasury yields at the same time, the rise of the Dow Jones is more driven by valuation expansion from declining risk premiums, reflecting early accounting of expectations for Trump's policies, while the Nasdaq's performance is more supported by the earnings of the Technology Industry.
Chart: The valuation expansion driven by low risk premiums is the main force behind the Dow Jones, while the earnings contribution from Nasdaq is comparatively higher.
Source: FactSet, China International Capital Corporation Research Department
Chart: The overall sentiment for earnings adjustment in the S&P 500 has receded in the third quarter.
Source: FactSet, China International Capital Corporation Research Department
The third quarter is precisely the peak time for the USA's 'recession trade', and the concerns about recession triggered by the 'Sam Rule' seem somewhat excessive (the US economy is not facing intense recession pressure, more of a controllable slowdown). However, it is also a fact that the overall economy is weakening, so it is not surprising that corporate profits, especially those related to strong cyclical sectors, are slowing down. Of course, this also led to the Fed's unconventional 50bp rate cut in September.
With the rate cut starting in September, especially after the expected catalysis post-Trump's election, the US stock market has repeatedly hit new highs. On one hand, although the easing of financial conditions post-rate cut can promote an early recovery in the real estate and investment sectors, which are sensitive to interest rates, on the other hand, it also anticipates more favorable growth expectations following Trump's election. At this point, the valuation of the US stock market (94% historical percentile since 1990) and sentiment (risk premium at 28% historical percentile since 1990, lower is more exuberant) are indeed at high levels. Sentiment can be exuberant for a while, but profits are more lasting. Therefore, the key to determining the future space of the US stock market still lies in profits, and the key to profits is whether the technology sector can continue and whether the cyclical can be restarted.
Chart: The valuation and sentiment of the US stock market being at high levels is also a reality.
Source: Bloomberg, China International Capital Corporation Research Department.
US stock market earnings in the third quarter: overall slowdown reflects economic downturn; cyclicals are the main drag while technology remains resilient, but structurally shift from hardware to software.
The S&P 500 earnings growth rate has slowed overall, while the Nasdaq has accelerated thanks to 'software'. On a comparable basis, the S&P 500's EPS in the third quarter grew by 5.5% year-on-year, significantly down from 11.7% in the second quarter. In contrast, the growth style Nasdaq index's EPS rose from 13% in the second quarter to 19%.
Chart: On a comparable basis, the third quarter S&P 500 Index EPS year-on-year growth rate is 5.5% (vs. 11.7% in the second quarter).
Source: FactSet, China International Capital Corporation Research Department
Chart: Breakdown of performance, Telecommunication Services, Information Technology and Consumer respectively contributed 2, 1.8 and 1.4 ppt.
Source: FactSet, China International Capital Corporation Research Department
Chart: In the third quarter, Semiconductors and Equipment, Real Estate Management and other EPS growth rates lead, Technology Hardware,REITsand other growth rates lag behind.
Source: FactSet, China International Capital Corporation Research Department.
Chart: Compared to the second quarter, the EPS growth rate for the third quarter in Real Estate Management and Development, Media & Entertainment has significantly increased, while the growth rate for Technology Hardware and Energy has slowed considerably.
Source: FactSet, China International Capital Corporation Research Department.
The year-on-year growth rate and profit contribution of the cyclical sector have both declined, with Energy (-18.4% vs. 7.7% in the second quarter), Finance (6.7% vs. 18% in the second quarter), Utilities (5.5% vs. 16% in the second quarter), and Industrials (-11% vs. -3% in the second quarter) all seeing slowdowns. The materials sector showed a slight year-on-year improvement but still remained negative at -5% compared to -9% in the second quarter. In terms of profit growth contribution, the cyclical sectors of Energy, Industrials, and Materials together dragged down profits by nearly 40%, and the contribution from the Finance sector also receded from 31% to 24%.
The growth rate and contribution of the Technology Industry remain resilient, but Software performs better than Hardware. Among them, the year-on-year growth rate for Media & Entertainment has turned significantly positive (29.3% in the third quarter vs. -8.1% in the second quarter), while Software and Services continue to rise (11% in the third quarter vs. 8.7% in the second quarter). However, the growth rates for Semiconductors and Equipment, and Technology Hardware, have continued to decline, from 57.7% and 7.2% in the second quarter to 38.8% and -22.5% respectively. In terms of profit growth contribution, the two sectors of Telecommunication Services and Information Technology contributed a total of 68% of overall profits, but the profit contribution from Telecommunication Services improved from -4% in the second quarter to 36%, while the contribution from Information Technology slightly decreased from 36% in the second quarter to 32%.
From the perspective of profit contribution, revenue has remained largely stable, while costs have risen slightly. In the third quarter, the year-on-year revenue growth rate of the S&P 500 fell slightly from 6.4% in the second quarter to 6.3%. The revenue growth rates of the Semiconductor and Equipment sector, Real Estate Management, etc., are leading, while the year-on-year revenue growth rates of Energy and Food & Beverage remain negative. In comparison, costs have risen: 1) Main business costs have increased due to rising oil prices, with a 1-2 month lag in transmission of crude oil prices. The year-on-year increase in crude oil prices in the second quarter led to a rise in year-on-year growth rate of main business costs from 0.87% in the second quarter to 2.1% in the third quarter; 2) Income tax expenses have increased, with the effective tax rate rising from 12.4% in the second quarter to 12.9%. 3) The decrease in interest costs and selling management expenses partially offset the cost pressure, benefiting from lower interest rates, with year-on-year growth rate of interest expenses falling from 19% in the second quarter to 14%; selling management expenses fell year-on-year from 5% in the second quarter to 4%. Overall, the net profit margin in the third quarter remained basically stable (12.4% vs. 12.5% in the second quarter), leverage levels decreased, and asset turnover improved, keeping the overall ROE of the S&P 500 at 20.8%.
Chart: Under comparable standards, the S&P 500 Index slightly fell to 12.4% in the third quarter, with net profit margins for both non-financial and non-financial non-energy sectors improving.
Source: FactSet, China International Capital Corporation Research Department.
Chart: Under comparable standards, the S&P 500 ROE remained flat in the third quarter; net profit margins and leverage ratios declined, while asset turnover improved.
Source: FactSet, China International Capital Corporation Research Department.
Chart: The effective tax rate for the S&P 500 in the second quarter increased compared to the previous quarter (third quarter 11.5% vs. second quarter 10.9%).
Source: FactSet, China International Capital Corporation Research Department.
Chart: The interest expense/EBIT (TTM) of the S&P 500 remained stable in the third quarter, while the income tax/pre-tax profit showed some increase.
Source: FactSet, China International Capital Corporation Research Department.
Chart: Commodity prices fell year-on-year in the third quarter, but the main business costs of the S&P 500 have increased.
Source: FactSet, China International Capital Corporation Research Department.
Chart: Wage growth has slightly rebounded, but the selling and administrative expenses of the S&P 500 continued to decline in the third quarter.
Source: FactSet, China International Capital Corporation Research Department.
How should the slowdown in profits be viewed? It is a normal reaction to the macroeconomic environment, and the slowdown in the technology sector is more about structural changes.
The decline in profits in the US stock market, particularly in the cyclical sectors closely related to the economy, reflects the overall economic slowdown in the third quarter. However, the market has begun to "look ahead." The weakness in US stock profits during the third quarter is not surprising, as it reflects the environment of slowing US economic growth at that time. The manufacturing PMI has remained in the contraction range, and the weakening of US employment data all represent this trend. Additionally, disturbances from extreme weather like hurricanes, along with rising unemployment triggering concerns of recession due to the 'Sam Rule,' may have affected consumer confidence and even corporate production activities.
Chart: Rising unemployment rate in the third quarter, 'triggering' the Sam Rule.
Source: Haver, China International Capital Corporation Research Department.
However, the market has clearly begun to "look ahead." On one hand, the initiation of interest rate cuts helps restore some interest-sensitive sectors of the economy (such as Real Estate and corporate investment). It was precisely because of the weakness in the economy and employment market in the third quarter that prompted the Federal Reserve to initiate unconventional interest rate cuts of 50bp in September. On the other hand, Trump's victory in the elections reignited market expectations for a series of expansionary policies following his election (overall tax cuts, financial deregulation, increased oil and gas supply, etc.). It is estimated that the natural expansion of private credit in the USA after the interest rate cuts, combined with the narrowing effect of government credit, will lead the US economy to bottom out and rebound around mid-2025, with cyclical sectors expected to become the "forerunners" of the recovery.
Chart: In the USA total social financing indicators we constructed, corporate and household financing year-on-year growth rates hit bottom and rebounded in January and July 2024 respectively.
Data source: Haver, China International Capital Corporation Research Department.
Chart: It takes about six months for the private sector's 'social financing' impulse to reflect in GDP.
Data source: Haver, China International Capital Corporation Research Department.
Chart: Fiscal policy may maintain moderate growth in 2025.
Source: Haver, IMF, China International Capital Corporation Research Department.
Chart: Historically, in the vast majority of cases, fiscal policies in the year following a general election have been tightening.
Source: Haver, China International Capital Corporation Research Department.
Chart: The various sectors of the US economy are experiencing a "rolling" mismatch; looking ahead, the switch between the "new" and the "old" suggests that the rate-sensitive cyclical sectors are the first to recover.
Source: China International Capital Corporation Research Department.
Regarding the slowdown in growth in the technology sector in the third quarter, it does not indicate that the overall trend has been "disproved", but rather reflects structural changes, manifested by a decline in "Hardware" from a high base, while the "Software" sector fills this "gap". Although the growth rate of the previously outstanding semiconductors and equipment sector has slowed, it still maintains double-digit growth, to some extent due to the previously high base, while the technology hardware sector is dragged down by the major weighted stock Apple. In contrast, the profitability growth of media entertainment and software services continues to rise. Furthermore, the ample cash flow of technology companies continues to support their stock repurchase and capital expenditure activities, with the capital expenditures of seven leading tech stocks maintaining high growth in the third quarter, rising from 52% in the second quarter to 59%, contributing to 24% of the overall non-financial capital expenditure of the S&P 500.
Chart: Operating cash flow growth rates in Utilities, Consumer Discretionary, and Information Technology lead, while Medical Care and Energy lag behind.
Source: FactSet, China International Capital Corporation Research Department.
Chart: Leading Technology stocks continue to expand capital expenditure, with a year-on-year growth rate of 59%.
Source: FactSet, China International Capital Corporation Research Department.
Chart: In the third quarter, the buyback scale of leading Technology stocks slightly decreased to 60.6 billion USD, with a year-on-year growth rate slowing to 23%.
Source: FactSet, China International Capital Corporation Research Department.
In fact, a common misconception in the market is that the surge in Nasdaq and leading Technology stocks is based on unsustainable high valuations and expectations. On the contrary, profits have been the core momentum behind this rise, contributing far more than other Industries. Since the beginning of the year, the rise of Dow Jones and S&P 500 primarily relies on valuation expansion due to a decline in risk premiums, contributing 91% and 52% to the respective 19% and 27% increases. In contrast, the rise of Nasdaq mainly comes from profit contributions, with 68% of the 31% increase since the beginning of the year attributed to profits, and the proportion of profit contributions from leading Technology stocks such as MAAMNNG is even higher (73%). However, looking back, the decline in profit growth for the Technology Sector in the third quarter also explains some investors' concerns that low growth cannot sustain high valuations.
Chart: The rise of Nasdaq mainly comes from profit contributions, with 68% of the 31% increase since the beginning of the year attributed to profits.
Source: FactSet, China International Capital Corporation Research Department.
Market space: Profit growth is expected to reach 10%; short-term valuations are somewhat high, and early next year will be critical. After a retracement, there may be another opportunity to enter; focus on cyclical resilience and the Technology mainline.
As US stocks reach their current position, both valuations and sentiment have become high. Profits will undoubtedly be the core variable determining the subsequent space, with the key to profits lying in two areas: cyclical growth and Technology. The former encompasses the economic cycle and the recovery resilience of Trump's policies, while the latter considers trends in the Technology industry.
Combining the US's own growth trajectory (gradual stabilization and recovery of the economy by mid-2025) and expectations for growth in overseas revenues (30-40% of overseas revenue), we estimate that US stock profit growth could reach 10% by 2025, slightly higher than this year's 9%. Of course, in our assumptions, the trend in the AI industry remains optimistic with high profit margins. At the same time, Trump's tax reform is expected to boost US profits by 3-4 percentage points, but whether this will reflect in 2025's profits depends on the progress of policy implementation. Structurally, focus on cyclical resilience and the Technology mainline.
首先，顺周期如金融、能源、地产与投资主要受益于几个方面：1)经济自然修复周期中，增长动能或出现“新”“旧”切换，利率敏感的地产和投资可能率先修复，但强度不会太大。我们测算名义投资环比折年增速从目前的5.9%小幅提升至2025年三季度的8.7%，地产销售增量以新屋为主，同比抬升6%至75~0.8 million套左右;2)特朗普主张的诸多政策也更多受益于顺周期板块，如减税政策下，金融、能源、交运的有效税率更高，因此受益弹性更大;降息周期接近尾声和后任财长贝森特的金融去监管主张直接受益于金融行业;特朗普放开油气开采有助于油气投资的提升等。工业巨头霍尼韦尔提出尽管在短期仍对销售增长保持谨慎，但公司预计在2025年增速将修复且利润率开始扩张;卡特彼勒预计仍将受益于政府基建项目，同时发电领域需求将在AI产业的提振下维持强劲。
图表：2025年家庭形成数量和自住房屋比例的稳定抬升或将带来2 million套增量需求
资料来源：Haver，中金公司研究部
图表：在现有销售比例下，成屋或维持在400~4.1 million套左右，新房销量有望同比增加6%至75~0.8 million套左右
资料来源：Haver，中金公司研究部
图表：2017年特朗普当选后采掘资本开支同比增速从-29%升至52%，连续两年大幅修复
Source: Haver, China International Capital Corporation Research Department.
Chart: The actual effective tax rates for Utilities, Biomedical, Real Estate, Materials, Telecommunication Services, and Semiconductors are all lower.
Source: FactSet, China International Capital Corporation Research Department.
Secondly, the trend in the Technology Industry remains the main focus, paying attention to whether AI technology can gradually be converted into revenue, and whether leading companies can continue to expand their capital expenditure. Meta, Google, and Amazon have all reported impressive growth in AI-related cloud services and ad revenues benefiting from AI technology in the third quarter. NVIDIA has also stated that "the demand for large-scale enterprise AI continues to increase," therefore the revenue side may still have resilience. In terms of capital expenditure, Amazon, Meta, Google, and Microsoft have all indicated plans to continue increasing investments in AI infrastructure, and Amazon emphasizes that the scale will exceed that of 2024, but Google has mentioned that the growth rate of its investments may slow down.
In contrast, there is limited room for further expansion in valuations. Given the current inflation (we expect USA inflation to bottom out in mid-2025) and monetary easing path (we estimate the Federal Reserve will have to cut rates 3-4 more times, with a terminal rate of 3.5-3.75%), we expect the reasonable center for the 10-Year T-Note yield to be around 3.8~4%. At the same time, the risk premium is already at the 28% historical percentile since 1990, with limited room for further decline and possibly, under certain conditions, even contraction. We estimate that dynamic valuations may slightly retreat to around 21. Based on an assumed profit growth of 10%, we forecast the S&P 500 Index level at 6300~6400 under the baseline scenario; in the pessimistic scenario, we expect the S&P 500 Index level to be around 5700~5900.
Chart: We expect USA inflation to have a CPI year-on-year level above 2% in 2025, bottoming out in mid-year (2-2.5%).
Data source: Haver, China International Capital Corporation Research Department.
Chart:possibility of a soft landing,In this scenario, the rate of unemployment is not expected to rise significantly, possibly only reaching around 5% to 5.1%.
Data source: Haver, China International Capital Corporation Research Department.
Chart: The appropriate federal funds rate under the equal-weighted Taylor rule is 3.1%, with the year-end inflation tail and risk potentially leading to a smaller rate cut.
Data source: Haver, China International Capital Corporation Research Department.
Chart: If the Federal Reserve stops lowering interest rates in 2025 as we predict, then the neutral interest rate level for the 10-Year T-Note will be 3.5%.
Data source: Haver, China International Capital Corporation Research Department.
In terms of pace, short-term focus on "risks that arise from increases"; after a pullback, it can be re-entered, with January 20 being a key point after taking office. In the short term, under the expectation of continued support, U.S. stock valuations are already at a high level, with many optimistic projections factored in.Technical Indicators.As the overbought situation continues to heat up, if some data in the future falls short of expectations or if the order and extent of policies advanced after Trump's election are less than expected, it could trigger a partial "correction" in market sentiment. Several key points are: will the release of November U.S. inflation on December 11 affect the December interest rate cut expectations; after Trump takes office on January 20, will inflationary policies (such as tariffs and immigration) exceed expectations, and can growth-oriented policies meet expectations (such as tax cuts and Oil & Gas supply)? Mid-January also coincides with the beginning of the fourth-quarter earnings season for U.S. stocks, and the market is generally sensitive, so if there are scenarios that fall short of expectations, it could induce certain pullbacks.
Chart: After taking office on January 20, inflationary policies may be quickly implemented, with growth-oriented spending policies advancing in February and March.
Source: USA Congress, Reuters, WSJ, China International Capital Corporation Research Department.
However, the market correction is not a bad thing. First, it is necessary to digest overly exuberant emotions to facilitate a more sustainable rise. Second, the long-term outlook is not pessimistic. The large-scale fiscal measures, technological advancements, and global capital rebalancing facilitated by the pandemic and the burst of AI in the past three years have become the three "macro pillars" supporting the strength of the US stock market. This is similar to the strong growth, large fiscal deficits, and trade deficits ('twin deficits') during the Reagan era, where the dollar remained strong while overseas funds continued to flow in, forming a mutually reinforcing "Reagan cycle." Many of Trump's policies may strengthen or even solidify these three pillars. Therefore, it is believed that as long as there is no directional reversal of these "three pillars," the trend of the US stock market may not be disrupted.
Chart: Large fiscal measures, technology, and global capital rebalancing are the three "macro pillars" supporting strong performance of the US economy and stock market.
Source: Haver, FactSet, EPFR, China International Capital Corporation Research Department.
Chart: The expansion of fiscal and trade twin deficits during the Reagan cycle.
Source: Haver, China International Capital Corporation Research Department
Chart: Significant increase in net inflow of funds in financial accounts
Source: Haver, China International Capital Corporation Research Department
Chart: In contrast, during the Internet Plus-Related technology revolution, fiscal policy actually contracted
Source: Haver, China International Capital Corporation Research Department
Chart: But still driving the strength of the US dollar.
Data Source: Haver, China International Capital Corporation Research Department.
This article is reproduced from the "Kevin Strategy Research" WeChat official account; Edited by Zhitong Finance: Li Fo.
