CITIC Securities: Uncertainty in Trump's policies may have been fully priced in, and the short-term correction in U.S. stocks may come to an end

According to the Zhitong Finance APP, CITIC Securities released a research report stating that given the uncertainty of Trump's policies may have been fully priced in by the market, and with signs of a double put emerging, the recent correction in U.S. stocks since mid-February may have come to an end. Technology stocks, which have seen significant declines and still maintain high growth rates, may welcome a technical rebound. However, from a medium-term perspective, it is still necessary to be vigilant about whether the global trade friction triggered by Trump will escalate, how the U.S. macroeconomic fundamentals and the Federal Reserve's monetary policy stance will evolve, and the potential disturbances to U.S. stocks from issues such as the upcoming fiscal X-date in mid-year. Once these uncertainties become clearer and the valuation premium is sufficiently digested, U.S. stocks may have more sustainable upward conditions in the second half of the year.

Event:

Recently, with a softening stance on tariffs from Trump and the Federal Reserve reiterating "transitory" and slowing down balance sheet reduction, major U.S. stock indices ended four consecutive weeks of decline since mid-February last week, with significant rebounds recorded overnight in major technology and cyclical sectors. CITIC Securities judges that under the emerging signs of a Trump and Fed double put, the short-term correction in U.S. stocks may have come to an end.

Trump put: The Trump administration has softened its stance on the upcoming implementation of reciprocal tariff policies.

In mid-February, the U.S. government released a "Reciprocal Trade and Tariff Memorandum," announcing the implementation of reciprocal tariffs on trade partners. President Trump subsequently announced that reciprocal tariff policies would be fully implemented starting April 2. However, as the date for the full imposition of reciprocal tariffs approached, Trump stated on March 21 that while there would be no exemptions for the upcoming tariff policies, the reciprocal tariff policy would retain a degree of "flexibility."

On March 24, Trump further announced that in the coming days, additional tariffs would be imposed on automobiles, timber, and chips, but his language regarding the full imposition of reciprocal tariffs softened. Trump stated that not all countries would have tariffs implemented on April 2, and some countries might receive exemptions, but the principle of reciprocity would still be followed. Previously, the EU imposed a 10% tariff on automobile imports, which is four times the 2.5% tariff rate for U.S. passenger car imports. When announcing exemptions for some countries, Trump mentioned that the EU had agreed to reduce automobile tariffs to 2.5%. As the implementation of reciprocal tariff policies approaches, the Trump administration's stance on tariffs has softened to some extent compared to before, but attention should still be paid to the results of the U.S. government's trade memorandum investigation in early April and the subsequent actual implementation of reciprocal tariffs.

In addition, recent investors are also concerned that federal layoffs/cuts in spending could have a significant negative impact on U.S. employment and consumption. However, CITIC Securities does not rule out the possibility of a shift in U.S. fiscal policy in the future under signs of economic weakness, suggesting attention to changes in expectations for government spending in the fiscal year 2026 after the debt ceiling issue is resolved.

Fed put: Reiterating "transitory" to pave the way for interest rate cuts, slowing down balance sheet reduction to protect financial system liquidity.

Although the Federal Reserve's March meeting maintained the overnight policy rate unchanged, Powell also stated that inflation caused by tariffs may be "transitory," and the Federal Reserve may again adopt a see/look through stance. After the first round of Sino-U.S. trade friction erupted, the Federal Reserve's Tealbook in September 2018 showed that compared to the actual EFFR level at the end of 2018 and "Higher trade barriers" Under the scenario assumption, its terminal interest rate is closer to the "see through" scenario of 2.3%, rather than the 2.8% under the "Higher trade barriers" baseline scenario. Coupled with the potential impact of current federal layoffs and spending cuts on employment, CITIC Securities believes that the main variable driving the future path of the Federal Reserve's overnight policy interest rate will gradually shift from inflation to changes in the labor market, and defining tariff-induced inflation as "transitory" to support the "see through" stance also paves the way for interest rate cuts if the labor market deteriorates.

In addition, this monetary policy meeting also announced a slowdown in balance sheet reduction. Although the balance of ONRRP has rebounded from USD 450 billion to USD 570 billion since early February, this more reflects the increase in the balance of U.S. money market funds during the same period. However, the credit spread of junk bonds has rapidly risen from 260bps in mid-February to 340bps in mid-March, reflecting a tightening of liquidity in the financial system. Since the second half of last year, the Federal Reserve's average monthly reduction of Treasury bonds and MBS remains high at USD 25.8 billion and USD 15.6 billion, respectively. Therefore, reducing the monthly average reduction limit of Treasury bonds to USD 5 billion is beneficial for nurturing liquidity in the financial system, especially in the context of the U.S. Treasury needing to withdraw TGA balances after the future debt ceiling issue is resolved.

Concerns about tariffs, federal layoffs/spending cuts, and interest rate cuts falling short of expectations may have already been priced in.

As of March 24, 2025, 99.8% of the S&P 500 component stocks have disclosed their financial reports for Q4 2024. On a comparable basis, the year-on-year growth rates of revenue and net profit for Q4 2024 are currently 5.1% and 14.9%, respectively, slightly down from the revenue growth rate in Q3 2024, while the net profit growth rate has increased by 5.5 percentage points; however, the extent of Q4 2024 performance exceeding expectations (LSEG Smartest, same below) has decreased compared to Q3 2024, with the total net profit exceeding expectations in Q4 2024 declining by 0.2 percentage points to 7.4%. The total revenue exceeding expectations has decreased by 0.4 percentage points to 1.0%, and the proportion of revenue falling short of expectations has increased by 1 percentage point to 12% compared to the previous quarter.

Additionally, since mid-January, with the continuous disclosure of financial reports and the ongoing implementation of the Trump 2.0 policy, the earnings expectations for U.S. stocks in 2025 have continued to be revised downwards. As of March 21, 2025, the expected revenue and net profit growth rates for the S&P 500 in 2025 have been revised down by 0.6 and 2.8 percentage points to 5.2% and 9.9%, respectively, and the expected net profit growth rate for 2025 has fallen below last year's actual growth rate of 11.0%. From an industry perspective, only the financial sector, which benefits from regulatory easing, has seen an upward revision in net profit expectations for 2025 (+1.2%), while other industries sensitive to tariffs and interest rates have been significantly revised down, including materials (-7.2%), real estate (-5.3%), and industrials (-3.2%). Additionally, due to the drag from Meta and Google, the communication services sector has also seen a 5.7% downward revision. Therefore, CITIC Securities believes that under the assumption that the U.S. does not experience a substantial recession, factors such as tariffs, federal layoffs/spending cuts, and interest rate cuts falling short of expectations have been relatively fully reflected in the current earnings expectations for U.S. stocks Initial signs of double put emerging, short-term US stock market correction may come to an end, but uncertainties remain mid-year.

Currently, the dynamic PE of the S&P 500 and Nasdaq 100 are 20.5 times and 24.1 times, respectively. Although they are still at relatively high historical percentiles (74% and 66%), they have narrowed by about 8% and 6% from the peak in mid-February. In addition, the valuations of key sectors including Information Technology (25.3 times, 70% historical percentile) and Consumer Discretionary (23.4 times, 66% historical percentile) have also adjusted to a more reasonable level. In contrast, only the valuations of Financials and Consumer Staples remain above 90%. Under the assumption that the negative impact of Trump 2.0 policies has been largely priced in, and with the backdrop of emerging signs of double put, CITIC Securities believes that the correction in the US stock market since mid-February has come to an end, and technology stocks that have previously declined significantly and still have high growth rates may welcome a technical rebound.

However, from a mid-term perspective, it is still necessary to be vigilant about whether the global trade friction triggered by Trump will escalate, how the US macro fundamentals and the Federal Reserve's monetary policy stance will evolve, and issues such as the upcoming fiscal X-date mid-year that may cause disturbances to the US stock market. After these uncertainties become clearer and the valuation premium is sufficiently digested, CITIC Securities believes that the US stock market may have more sustainable upward conditions in the second half of the year