Another new week, another new historical high point. The S&P 500 index reached a new record high on Friday, the third time this week and the sixth time in July. The market continues to ignore the ongoing tariff escalation (30% tariffs on Mexico and the EU), the price pressure hints in the latest CPI data, and the recent drama of potentially removing Fed Chairman Powell "for good reason".
The recent rally has pushed the S&P 500's price-to-earnings ratio close to its historical high, just as the second-quarter earnings season is about to begin, with investors paying top dollar for any stock exposure.
Meanwhile, encouraged by the stock market performance, President Trump has reignited his tariff escalation battle and is reportedly planning to add industry-specific tariffs on top of existing country-specific tariffs, to be implemented within two weeks. The initial target industries will be pharmaceuticals and semiconductors, aiming to comprehensively cover US import sectors.
Despite the new threats, the market has almost completely ignored this round of tariff escalation, with "tariff-sensitive" sectors continuing to underperform the benchmark index. Whether due to expectations of a future "TACO" moment (trade tension easing), reduced targeted attacks on major trading partners (expected Xi-Trump meeting in South Korea), or confidence in the private sector's ability to withstand impacts, the market is likely to remain deaf to trade conflicts until further notice.
Speaking of policy, the Trump administration has stirred up a new Fed controversy, with media reports suggesting that Fed Chairman Powell might be fired due to significant budget overruns in building renovations.
Some renovation work costing around $2.5 billion for the Fed's Washington headquarters has put Powell in a difficult position due to project management issues, with the project cost about $600 million higher than initially expected. When asked on Tuesday if the expensive renovation constitutes grounds for dismissal, Trump said: "I think to some extent, yes." -- Capitol Hill Report
After leaking this absurd claim, Trump quickly retracted the threat, and the market overwhelmingly consensus is that Powell will complete his term until 2026.
Meanwhile, Fed Governor Waller took an somewhat unconventional step, expressing "dissent" in advance, publicly stating his preference for a rate cut at the July meeting, reasoning that the private sector's performance is not as good as everyone imagines, and the US labor market is "on the edge" because most employment is concentrated in the public sector.
With the Fed's language turning dovish and the stock market continuing to hit new highs, isn't the market in the same risk appetite mode as the past two months? Or is the market pricing in a dovish Fed in advance, getting ahead of the upcoming rate cut and driving the "Goldilocks economy" narrative?
In any case, inflation expectations have quietly returned, global long-term yields remain high, while inflation break-even points have climbed to their highest levels in years, and financial conditions remain loose.
Last week's data also cooperated well, with the University of Michigan report showing a slight improvement in consumer confidence for current conditions and future expectations, and 1-year inflation expectations dropping to pre-tariff levels (4.4% vs. previous 5.0%).
This week's earnings season will reach its peak, with Tesla and Alphabet set to report on Wednesday. According to Bloomberg, 58 out of 498 S&P 500 components have already reported earnings, exceeding expectations by 7.8%. Even as earnings grow, the price-to-sales (P/S) and price-to-earnings (P/E) ratios of US and global stocks have reached or exceeded historical highs, with investors paying "full price" to increase risk exposure at this moment.
Surprisingly, despite the continued market rise, we have not yet seen extreme sentiment readings in traditional momentum indicators: the AAII bull-bear ratio remains near the midpoint of its range, and search engine queries for "surge" stories remain at historical lows.
Have macro doomsayers finally become extinct? Has everyone accepted the doctrine that "stocks only go up"? Don't short against the trend...
The cryptocurrency realm certainly hasn't missed its own "fear of missing out" moment. Ethereum is performing excellently, approaching the $4,000 area (22% rise in 5 trading days), with some major Altcoins also recording double-digit gains this week. Bitcoin also hit its own historical high, breaking through $118,000, though the excitement seems somewhat restrained. Until further notice, it feels like good days are back.
The ETH/BTC ratio has temporarily resurrected from the grave, improving to its best level since the first quarter. Some attribute this to the focus on stablecoins/real-world assets benefiting the proof-of-stake network, while others see Ethereum's new Treasury strategy as a catalyst. We personally believe this is just a classic risk appetite spillover, as most mainstream traditional finance funds have been fully deployed in Bitcoin over the past 7 months.
As a positive milestone, Congress did ultimately pass landmark stablecoin legislation last week, exchanging stricter federal and state regulation for more stablecoin payment channels. This may bring some structural tailwinds, as evidenced by Ethereum ETF's record capital inflows over the past two weeks, with July's total inflows exceeding $3 billion, and daily inflows (between $300-500 million) 5 to 10 times the daily inflows of the first half of the year.
Risking repetition from most of the past 8 weeks... Never short a dull market, and enjoy the rolling good times! As we enter the hot summer, best of luck to all friends and may your trading be smooth!
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