CICC: The "Truth" Behind the Weakening Growth in the United States

Since the Spring Festival of 2025, U.S. stocks have performed poorly in the global market, contrasting sharply with the strength of Hong Kong stocks. The growth-style Nasdaq index has lagged with a 3% decline, reversing the strong momentum of 2024's "one-man show." AI technology leaders such as Amazon (-10%), Google (-15%), and Tesla (-20%) have also experienced significant pullbacks, with only Nvidia (7%) and Apple (6%) showing slight increases.

Technology stocks are not only a major support for U.S. stocks but also have a crucial impact on whether the U.S. economy and global capital can rebalance to other markets, as they are interconnected (see "Three Pillars of This Bull Market"). For this reason, the recent decline of technology leaders has attracted widespread attention, raising concerns about whether the two-year market trend is coming to an end. This comes at a time when some economic data has weakened, and tariff risks remain, further increasing market worries.

Chart 1: Since the Spring Festival of 2025, among global major asset performances, the growth-style Nasdaq index has lagged with a 3% decline.

Source: Bloomberg, FactSet, CICC Research Department

Chart 2: Technology stocks are not only a major support for U.S. stocks but also have a crucial impact on U.S. growth and global capital rebalancing.

Source: Haver, FactSet, EPFR, CICC Research Department

Chart 3: The rise in risk premium has caused Google and Tesla to drop by 15% and 20%, respectively, while only Nvidia (7%) and Apple (6%) have shown slight increases.

Source: Bloomberg, FactSet, CICC Research Department In fact, we already pointed out in our report "How Much Room Is Left for US Stocks?" published on December 8, 2024, that attention should be paid to the short-term "risks that arise from rising," which are based on some "visible" risks: for example, the high valuations of US stocks at that time incorporated too many optimistic expectations, and after Trump took office, he would first introduce tariffs and immigration policies that the market did not favor, disturbances during the fourth quarter earnings season, and the possibility of economic data weakening again, all of which could trigger an emotional "correction." The market movements over the past few months have largely aligned with this expectation, but it has only been a fluctuation rather than a trend reversal.

However, recently, the pressure on US stocks has increased again, and concerns have arisen. In addition to the data weakness that is neither surprising nor a "bad thing" ( "Pausing Rate Cuts to Continue Rate Cuts"), more importantly, the escalating tariff risks and the impact of DeepSeek's rise on the narrative of America's AI advantage cannot be refuted. This also explains why the recent US Treasury bond yields quickly fell from 4.8% to 4.2%, and the CME futures implied rate cut expectations have risen again to 2 times within the year (the probability of a rate cut in June has risen to 60%).

Chart 4: Recent CME futures implied rate cut expectations have risen again to 2 times within the year, and US Treasury bond yields quickly fell from 4.8% to 4.2%

Source: Bloomberg, CICC Research Department

However, is the current market's concern about the US economy and US stocks really as significant as it seems on the surface? Or is it just because these short-term concerns cannot be refuted and can only be linearly extrapolated? After all, the market's concerns about the recession due to the "Sam Rule" in July 2024 were clearly excessive. In this regard, we will clarify the "truth" behind the recent macroeconomic slowdown in the US in this article, in order to better judge the direction of US stocks and other markets, as well as the strength and weakness of the US dollar and US Treasury bonds.

Factor 1: Economic Weakness Is Natural, Neither Surprising Nor Bad; Moderate Concerns Can Be Addressed by Lowering Interest Rates to Boost Demand, Just Waiting for Some Time

The recent weakness in some data is still a continuous manifestation of the "reflexivity" of interest rates. We have repeatedly emphasized that in this cycle, the costs and returns of various sectors in the US are "very close," which means that a decline in interest rates can quickly boost demand and strengthen economic data; conversely, an increase in interest rates will again suppress demand, reflected in the weakening of economic data. This is the reflexivity of interest rates, although there will be a transmission lag of 2-3 months in between. For example, in July 2024, non-farm employment and ISM manufacturing PMI were significantly below expectations, and the market's concerns about slowing growth continuously pushed up rate cut expectations. As a result, US Treasury bond yields fell to a low of 3.6%. Subsequently, in September, non-farm employment, retail sales, new home sales, and other data benefited from the rapid decline in interest rates, exceeding expectations Chart 5: The rental return rate of residential sector investment is "very close" to mortgage rates

Source: Haver, CICC Research Department

Chart 6: The overall investment return rate of the corporate sector is lower than the financing cost, but the difference is not significant

Source: FDIC, Federal Reserve, CICC Research Department

Chart 7: The main contribution to the easing of financial conditions index since the end of last year is the decline in long-term interest rates

Source: Bloomberg, CICC Research Department

Chart 8: The easing of the financial conditions index generally takes 2-3 months to translate into improvements in growth

Source: Bloomberg, CICC Research Department

Therefore, the recent data weakness we have seen is the result of continuously rising interest rates since September last year, while the decline in interest rates since January is likely to have a positive effect on the economy that will be reflected in the coming period. The "Trump trade" at the end of last year drove U.S. Treasury yields to a peak of 4.8%, and the suppressive effect of high interest rates is gradually reflected in recent economic data, such as the unexpected decline in January retail sales, the drop of January Markit Services PMI into contraction territory, and the sales data for existing and new homes in January falling short of expectations In this sense, the more one worries about a recession and expects interest rate cuts (which drive down rates to boost demand), the less likely a recession will occur and the less likely rates can be cut (as seen from July to September last year). Conversely, the less one expects rate cuts (which push rates up to suppress demand), the more likely it is that rates can actually be cut (as seen from late last year to early this year). This is also why we have consistently emphasized that expectations for rate cuts and U.S. Treasury yields should not be linearly extrapolated; one must "think and act in reverse."

Moreover, since January, there have been many one-time factors that have caused growth to weaken, so there is even less need to overly worry about the U.S. economy sliding into recession. For example, the wildfires in Los Angeles in January partially dragged down overall demand, and the uncertainty surrounding Trump's tariff policy led to an increase in import demand, which, as a drag on GDP, caused the Atlanta Fed's GDPNow model to predict a negative quarter-on-quarter growth rate of -1.5% for the first quarter.

Chart 9: The Atlanta Fed's GDPNow model predicts a negative quarter-on-quarter growth rate of -1.5% for the first quarter.

Source: Atlanta Fed, CICC Research Department

Conclusion: The current data weakness is neither unexpected nor a "bad thing"; it is an inevitable result of the previous high interest rates (our model estimates that inflation will begin to decline after February). Precisely through this concern, interest rates can decline and expectations for rate cuts can return, thereby boosting demand again. Therefore, this is not a cause for concern; we just need to wait for some time. The current "rolling" misalignment of various segments of the U.S. economy is still in a slowing cycle, and the service industry and consumer demand itself are part of the "seesaw." The improvement in real estate and investment catalyzed by falling interest rates can compensate for this decline.

Chart 10: The current "rolling" misalignment of various segments of the U.S. economy is still in a slowing cycle, and the service industry and consumer demand itself are part of the "seesaw."

Source: Haver, CICC Research Department

Factor Two: Tariff Risks Create Supply Concerns, Cannot Be Disproven in the Short Term; But Also Face Real Constraints, Growth Policies Have Yet to Be Formulated

However, the biggest difference from last July to September is the escalating tariff risks that may lead to supply-side inflation concerns. This will significantly affect or even block the transmission effect of the rate reflexivity mentioned above, and in extreme cases, lead to supply inflation pressure, putting pressure on the Federal Reserve to raise interest rates (see "The 'Immediate Concerns' and 'Long-term Worries' of Tariffs") Although we believe there is a tendency for excessive concern, the intensive tariff statements and uncertainties since Trump took office for over a month have kept the market under the shadow of these worries.

Chart 11: PIIE estimates that imposing a 25% tariff on Canada and Mexico, and an additional 10% tariff on China, could lead to a 0.54ppt increase in CPI by 2025.

Source: PIIE, CICC Research Department

Since Trump took office just over a month ago, he first signed a presidential executive order using IEEPA to impose a 25% tariff on Mexico and Canada (but delayed implementation) and a 10% tariff on China [1]. On February 10, he announced a 25% tariff on steel and aluminum products, and then on February 13, he signed a study on "Reciprocal Tariffs" [2]. At the end of February, he proposed to impose a 25% tariff on the EU and even an additional 10% tariff on China [3]. The uncertainty and intensity of these actions are evident, and it is no wonder that market concerns persist.

Chart 12: The tariff policy since Trump took office for over a month has seen multiple reversals.

Source: The White House, CICC Research Department

It must be acknowledged that tariffs and immigration policies pose significant risks to U.S. growth and Federal Reserve policies, but we would like to point out two things: First, Trump will also face the reality of midterm election constraints and the backlash of inflation (see "The 'Immediate Concerns' and 'Long-term Considerations' of Tariffs"). Recent data also reflects this signal, with January non-farm wages accelerating in both month-on-month and year-on-year growth; the Michigan Consumer Survey's inflation expectations for the next year jumped from 3.3% in January to 4.3%, marking a significant increase for the second consecutive month and the highest value since November 2023. However, if inflation spirals out of control, leading to a forced tightening of Federal Reserve policy (Powell's term as Fed Chair ends in May 2026), it will inevitably impact both the U.S. stock market and the U.S. economy, making it hard to imagine that it won't affect the midterm elections at the end of 2026 (currently, the Republican Party holds a slim lead of only 5 seats in both the House and Senate) Therefore, if this constraint truly exists, "raising high and putting down slowly" may be a better strategy for tariff policy before 2026, or it may try to hedge with other growth policies as much as possible.

Chart 13: Our inflation sub-model also predicts that the U.S. CPI will not turn back down until after February.

Source: Haver, CICC Research Department

Chart 14: The Michigan Consumer Survey's inflation expectations for the next year jumped from 3.3% in January to 4.3%.

Source: Bloomberg, CICC Research Department

Chart 15: The latest Gallup poll shows that inflation and immigration remain key issues.

Source: Gallup, CICC Research Department

Chart 16: The Republican Party only maintains a slight lead in the House of Representatives.

Source: AP, CICC Research Department

Secondly, the order of advancing different policies varies due to process differences, so policies that the market dislikes are at the forefront, while those that the market likes are relatively behind. We previously pointed out in our election series reports that after Trump took office, policies such as tariffs and immigration, which are mainly based on executive orders, can be launched more quickly in terms of process, while growth policies like tax cuts need to go through Congress (Pathway Simulation of Trump’s Policies and Deals), thus the intensive launch of short-term inflationary policies lacks the moderation of growth policies Market concerns cannot be falsified, so trading can only occur in this atmosphere, which aligns with our indication in early December last year regarding "The Rhythm and Nodes of the Trump Trade," namely that the short-term Trump trade would temporarily pause, but growth-oriented policies might return to investors' attention and boost risk appetite after March. In fact, if everyone recalls the situation during the first term in 2017, it would not be surprising; after Trump took office in January 2017, the rapid reversal of the Trump trade was due to the initial push for healthcare reform, which did not resume until the tax reform was passed at the end of September. If the market-friendly policies advocated by Bessenet gradually emerge after March-April, it may alleviate market concerns.

Chart 17: After Trump's election in November 2016, there was a rapid warming, but the healthcare reform bill prioritized by Trump in late March unexpectedly faced setbacks within the House Republican Party, marking a turning point for the pause in the Trump trade, which did not resume until the tax reform framework was released at the end of September.

Source: Bloomberg, CICC Research Department

Conclusion: The increased risk of tariffs has heightened market concerns about supply-side inflation, which cannot be falsified in the short term, but may also be exaggerated. The "real constraints" faced by Trump and the gradual emergence of growth-oriented policies expected by the market will help alleviate some concerns. After all, it has only been a little over a month since taking office, and the market is still in the digestion phase of the intensive policy rollout. As growth-oriented policies such as gradual "desensitization" and tax cuts are introduced, there may be some relief.

Factor Three: AI Narrative Faces Impact, Short-term Valuation Digestion, but Trend Reversal Unlikely

DeepSeek's rise after the Spring Festival has triggered a revaluation narrative for Chinese assets and broken the narrative of American AI dominance, making Hong Kong stocks, represented by leading internet companies, the best-performing market since early 2025. The underlying narrative of this "East Rising, West Falling" is actually the market's concern over the rationality of large-scale capital expenditures in American tech stocks, reflected in valuation contraction. In terms of performance, the tech style, which previously incorporated more optimistic industrial expectations, has retreated more, while the Dow Jones and S&P 500 indices have remained relatively unchanged; the significant pullback is mainly concentrated on the valuation contraction brought about by rising risk premiums, while profit contributions are still increasing, which also reflects that it is not an actual profit "collapse," but rather a retraction of previously overly optimistic expectations.

Chart 18: The significant pullback is mainly concentrated on the valuation contraction brought about by rising risk premiums, while profit contributions are still increasing.

 Source: FactSet, CICC Research Department

The short-term weakness in the US stock market has shifted the market's focus to changes in the AI narrative, even leading some to overlook the results of the fourth-quarter earnings season. In fact, the comparable earnings growth rate of the S&P 500 index for the fourth quarter has significantly increased from 6% in the third quarter to 16%, with the contribution of information technology earnings still close to 30%, and the financial sector's contribution rising from 24% to 47%. Large-scale capital expenditures are unlikely to "cool off" as a result; among leading tech stocks, in addition to Microsoft's capital expenditure guidance stabilizing, Meta, Apple, and Google have all indicated they will continue to increase investments in the AI field. Moreover, Meta and Google are benefiting from the conversion of AI technology, with their core advertising revenue businesses showing strong year-on-year growth. In a sense, the short-term adjustment itself is not a bad thing, as it can eliminate unreasonable valuation bubbles; otherwise, sustained increases would be difficult to maintain. We believe it may be premature to conclude that the tech narrative has been falsified; the current fundamental resilience of leading tech companies is much stronger than during the internet bubble period, when the leading net profit contribution of 9% accounted for 22% of market capitalization, whereas the current 27% net profit contributes to 30% of the leading market share.

Chart 19: The comparable earnings growth rate of the S&P 500 index in the fourth quarter has significantly increased, with the contribution of information technology earnings still close to 30%.

Source: FactSet, CICC Research Department

Chart 20: The market capitalization share of leading tech stocks has reached 30%, with the concentration effect of leaders far exceeding that of the internet revolution period.

Source: FactSet, CICC Research Department

Chart 21: During the internet bubble period, a net profit contribution of 9% accounted for 22% of the leading market capitalization, whereas the current 27% net profit contributes to 30% of the leading market share.

![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/fzHRVN3sYsibZyGHkwicHhbUQynr3ia1afiblT9OibZ5NCCVl2vwYPF6jmJXgSmBhYzso0xoVU4cYoxEw7tKc2ibut2g/640? Data source: FactSet, CICC Research Department

Conclusion: The impact of AI narratives helps to squeeze out some overly unreasonable bubbles and excessive emotions. However, in the medium to long term, it is too early to judge an overall industry trend reversal, as the fundamentals of leading technology companies are far more resilient than during the internet bubble period.

Asset implications: In the short term, it is still necessary to digest unverifiable risks, with a turning point to be observed after March-April; there are trading opportunities in U.S. Treasuries, and after significant declines in U.S. stocks, re-entry may be considered, with the dollar remaining relatively strong.

Overall, the impacts of interest rate changes leading to weakened growth and the sequence of Trump policy advancements, which we highlighted in "Key Variables at the Start of 2025," have all materialized, but the rise of DeepSeek has caused additional shocks.

In the short term, the market will still be influenced by the aforementioned unverifiable risks and will need to wait for a while, but we expect under the baseline scenario: 1) The reflexivity of declining interest rates may change around March-April, with inflation data starting to weaken after February under the current path, while the transmission of interest rates to growth generally requires 2-3 months; subsequent expectations for interest rate cuts may partially return, and some interest rate-sensitive data may gradually improve again; 2) Market-friendly growth policies can be observed in March, and of course, the observation point for whether tariffs will escalate is also during this period. At the end of February, the U.S. House of Representatives passed a Republican budget resolution, which includes preliminary plans for tax cuts. However, since both chambers need to pass the spending bill for the fiscal year 2025 before March 14 to avoid a government shutdown, Senate Republicans have also prepared a backup budget resolution that includes priority policies on border security and energy, while the more contentious tax cut issues between the two parties will be postponed until later this year [4]. 3) The sustainability of AI industry trends and the profit conversion capability of capital expenditures need to be observed, but after sufficient valuation adjustments of leading stocks, it will help alleviate pressure.

Therefore, the short-term market is primarily focused on digesting expectations, either waiting for time or reaching reasonable positions. We recommend: 1) For U.S. Treasuries, "think and act in reverse," as there are short-term trading opportunities for long positions. Assuming there are still two expected interest rate cuts this year (to 3.75%), the 10-year U.S. Treasury yield may fall to around 4-4.2%, but it should not be overly extrapolated; 2) U.S. stocks may still experience volatility in the short term, but after significant declines, re-entry may be considered. Under the baseline scenario, we estimate that a 10% earnings growth for the S&P 500 in 2025 corresponds to 6300-6400 "How Much Room Is Left for U.S. Stocks?", with short-term support for the S&P 500 index at 5600-5700 (assuming ERP returns to the average level during the 2024 recession expectation phase), and the Nasdaq support level at 17700-17900. In fact, compared to Hong Kong stocks, one needs to "catch a few rapid rebounds" to outperform, while U.S. stocks can do well by "avoiding a few unexpected large declines"; the former presents alpha opportunities but lacks beta, while the latter has beta disturbances but alpha remains. The dollar may still be relatively strong, as recent trends have proven this point Chart 22: U.S. Treasury "Think and Act in Reverse," with Tactical Long Opportunities in the Short Term

Source: Bloomberg, CICC Research Department

Chart 23: Short-term Overall Volatility in U.S. Stocks, with Support Levels for the S&P 500 Index at 5600~5700, and a Baseline Scenario Corresponding to 6300~6400 in 2025

Source: FactSet, CICC Research Department

Authors: Liu Gang, Yang Xuanting, Source: CICC Insights, Original Title: "CICC: The 'Truth' Behind the Weakening U.S. Growth"

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The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk