Ping An Securities: The expectation of economic "stagflation" is rising, coupled with downward adjustments in performance expectations, putting further pressure on US stocks to correct

According to the Zhitong Finance APP, Ping An Securities has released a research report stating that under the current circumstances, all dollar assets may face headwinds, and there is a need to be cautious of price volatility risks. In terms of U.S. stocks, the expectation of economic "stagflation" is rising, coupled with a downward revision of performance expectations for 2025. Given that there is still room for convergence in U.S. tech valuations, it is expected that U.S. stocks will continue to face further correction pressure. The key to a renewed rise in U.S. stocks may lie in slowing down the balance sheet reduction and interest rate cuts. Due to the difficulty of implementing these measures in the short term, it is expected that there will be no significant positive news in the near future. Regarding U.S. Treasuries, under the expectation of "stagflation," U.S. Treasury yields still have room to decline, leading to a flattening of the curve. As for the dollar, the U.S. fundamentals are weakening, and with the diminishing interest rate advantage between the U.S. and non-U.S. countries, the dollar may still have room for depreciation.

Since late February, dollar assets have shown a trend of falling U.S. stocks, rising U.S. Treasuries, and a weakening dollar index, mainly influenced by three factors: the Deepseek impact on the U.S. AI tech bubble, disruptions from Trump’s policies, and marginal weakening of economic data. First, Deepseek's impact on the narrative dominated by the computing power of U.S. AI companies has squeezed the valuation bubble of tech stocks, raising doubts about the "exceptionalism" of U.S. stocks. Second, Trump's tariff policies are complex and ever-changing, with increasing intensity, which has heightened market risk aversion. Additionally, the rapid implementation of contractionary policies such as spending cuts and layoffs has increased market concerns about employment. Third, some macro data has shown marginal slowdown, further exacerbating market worries about the U.S. economic outlook. From the performance of dollar assets, the market is not only squeezing the tech bubble but also trading on expectations of a U.S. economic recession, primarily due to the ongoing impact of various policies since Trump took office.

Against the backdrop of rising debt pressure, the pace of Trump’s contractionary policies is far outpacing that of growth-oriented policies, while the effects of growth policies may fall short of expectations, making it more likely that the economy will first experience negative shocks from policies in the short term; coupled with the potential upward pressure on inflation from tariff policies, the risk of stagflation in the U.S. economy is continuously rising. In terms of contractionary policies, 1) The DOGE spending cut and layoff plan will impact employment and growth. According to the latest February non-farm payroll data, the effects of policy layoffs have begun to show, and the drag on non-farm payrolls in March is expected to increase. 2) Tariff and immigration policies will exert upward pressure on inflation. Recent estimates from various institutions show that tariffs could raise U.S. inflation by between 0.1% and 0.8%, while immigration policies may push inflation up by 0.15% to 0.20%. Regarding growth policies, based on the current budget resolution, if the Trump administration does not cut spending sufficiently, it may not be able to propose other tax cuts besides extending the TCJA Act. Moreover, the effect of extending the TCJA Act on supporting economic growth may also fall short of expectations. Additionally, the current budget resolution has only passed through Congress, and referencing Trump’s previous term, it may be implemented by the end of the year, leaving room for coordination in its content. This means that the probability of Trump’s most important growth policy, tax cuts, taking effect before the end of the year is relatively low.

Overall, although current U.S. economic data has not shown obvious signs of recession, as the effects of Trump’s various economic policies gradually become apparent, the risks of weakening U.S. growth and rising inflation are continuously increasing, and the market's focus may shift from "recession" to "stagflation." ** It is worth emphasizing that, considering the underlying logic of Trump's tariff policy and the structural characteristics of inflation, the upward space for U.S. inflation may actually be limited, while the risk of "stagflation" may be more concerning