The US stock market has entered the "Trump New Cycle"

The short-term rebound of the US stock market is primarily driven by sentiment. However, under the impact of tariffs on profits, the pressure of high valuations, and the lagging effects of policies, there is still potential for adjustment.

I. Recent Oversold Rebound in the US Stock Market

The US stock market, which had previously fallen into a "technical bear market," has seen a consecutive rebound due to the suspension of "reciprocal tariffs": from April 8 to April 12, the Dow Jones, Nasdaq, and S&P 500 rose by 8.83%, 15.22%, and 12.33%, respectively.

The adjustments in the US stock market since mid to late February can be roughly divided into two waves:

The first wave (February 19 - March 13) mainly involved the decline of the "exceptionalism" narrative surrounding US technology due to the rise of China's Deepseek. The launch of Deepseek-V3 and -r1 not only broke the valuation premium associated with the oligopoly of US technology algorithms but also raised doubts about the long-term demand for computing power chips, as they achieved similar results at a very low cost. Meanwhile, Nvidia's major clients are also developing their own custom computing power chips to reduce dependence on Nvidia. During this period, the US technology sector led the decline.

The second wave (April 2 - April 8) was primarily driven by Trump's unexpectedly aggressive reciprocal tariff policy, which led to soaring inflation expectations and concerns about declining actual consumption. Global risk assets fell simultaneously, with the US stock market, at the center of the storm, even entering the "technical bear market" range. The recession narrative caused widespread declines across sectors, with the energy sector suffering the most, while defensive sectors such as consumer staples and utilities held up relatively well.

After the sharp decline, some technical indicators showed that the US stock market was oversold in the short term. For instance, on April 8, the 6-day RSI of the S&P 500 index fell to 11.19, clearly entering the oversold zone and reaching a new low since January 2022; on the same day, the S&P 500 index was 10.2% below the lower Bollinger Band, having crossed below the lower band for four consecutive days. However, as of April 25, the S&P 500 index had returned above the middle Bollinger Band, with the 6-day RSI even approaching the overbought line, suggesting that market sentiment may have fully recovered.

At this point, how can we assess the direction of the US stock market in the next phase?

II. Tariff Impact and Recession Concerns Continue to Suppress US Stock Earnings Expectations

Recently, various foreign investment banks have generally raised the probability of a recession in the US this year. As of April 25, a Bloomberg survey indicated that the probability of a US economic recession had risen to 40%, while the betting probability for a recession on the Polymarket platform had increased to 54%.

The expectation of economic recession inevitably drags down the earnings expectations of U.S. stocks. In just one month, the companies in the S&P 500 index experienced the most severe earnings downgrades since 2022. According to Factset, as of April 25, the average EPS for the S&P 500 index for the full year of 2025 has fallen to 265.87, a decrease of 2.8% from the beginning of the year. Among them, cyclical industries such as energy, industrials, and consumer discretionary are the hardest hit, while information technology and communication services, which have a high proportion of overseas revenue, are also included in the earnings downgrades. Only the utility sector's earnings expectations remain relatively stable (with only 2% of overseas revenue).

Looking at the Mag7, aside from Deepseek's engineering innovations in saving computing power costs that make the long-term demand for Nvidia's computing power chips difficult to refute, the impact of Trump's tariffs has also directly or indirectly affected the earnings expectations within the Mag7.

For example, Apple and Tesla, whose supply chains and revenues rely on China and global markets, are directly affected by the comprehensive tariff increases; Amazon's retail business (online stores, offline stores, and third-party merchant services) accounts for nearly 70% of its revenue, with North America contributing 60%. The suppression of U.S. consumer confidence by tariffs will directly impact Amazon's performance; Google and Meta's revenues are highly dependent on advertising (Google's advertising revenue accounts for 80%, and Meta's for 97%), but advertising revenue is highly correlated with the economic cycle. Once recession expectations form, demand for advertising services often declines significantly; in contrast, Microsoft, whose core business relies on enterprise licensing and diversified software sales, may remain relatively stable under the backdrop of tariffs and recession.

Moreover, if the Mag7 begins to reduce capital expenditure, the commercialization process of AI and long-term demand expectations for chips will also slow down, which in turn reinforces the impact of recession expectations on the valuation of the Mag7.

III. U.S. Stock Valuation Remains Pessimistic

The bull market in U.S. stocks since 2023 has shown significant leadership effects from technology stocks, with most of the earnings realization and stock price increases contributed by leading tech giants. From 2022 to 2024, the revenue share of the Mag7 in the S&P 500 increased from 11.8% to 13.5%, and the net profit share of the Mag7 in the S&P 500 index rose from 17% to 23.2%From 2022 to 2024, the cumulative increase of Mag7 and the S&P 493 index excluding Mag7 were 85% and 23%, respectively, showing a significant difference. If NVIDIA is removed from the Nasdaq 100 index, the cumulative increase will shrink by 4%.

Since the adjustment of the U.S. stock market on February 19 this year, technology giants have led the market decline, with Mag7 and the S&P 493 index excluding Mag7 falling by 16.0% and 7.8%, respectively. From a valuation perspective, as of April 25, the price-to-earnings ratio of Mag7 was 30.46 times (29.1% percentile over the past three years), while the price-to-earnings ratio of the S&P 493 index was 22.35 times (67.7% percentile over the past three years).

However, even if valuations have retreated, they are still relatively expensive. As of April 25, the ERP (Equity Risk Premium, the inverse of the price-to-earnings ratio minus the risk-free asset yield) of the S&P 500 index was -0.2, approximately 0.5 standard deviations below the three-year average.

IV. Why has the Trump put disappeared?

There is a stark difference in asset sizes among American households at different wealth levels. According to Federal Reserve data, as of Q4 2024, the bottom 50% of households in the U.S. hold only 2.5% of the nation's wealth, while the top 0.1% and top 1% of households control 13.8% and 30.8% of the wealth, respectively. Further examining the asset structure of households, nearly half of the total assets of the bottom 50% households are in real estate, backed by mortgages, with stocks and funds accounting for less than 5%. In contrast, for the top 0.1% and top 1% households, stocks and funds account for over 40%.

The bull market in U.S. stocks over the past two years has widened the wealth gap among American households. From 2023 to 2024, the S&P 500 index increased by a cumulative 53%, while the total assets of the top 0.1%, top 0.1-1%, 90-99%, 50-90%, and bottom 50% households increased by 18.3%, 17.5%, 14.3%, 12.1%, and 6.4%, respectively. Behind the differences, part of it is due to the distribution of existing wealth, while another part is related to the wealth creation capability of enterprises.

As mentioned earlier, this wave of technology and AI is primarily driven by the rise of leading companies, which has boosted the index. However, the profit margins of many small and medium-sized enterprises are actually constrained by high inflation levels, and their financial scale and capital expenditure levels are also limited by high interest rates, making effective expansion difficult. Small and medium-sized enterprises are the main force in absorbing the U.S. job market. According to BLS statistics, from 2013 to 2023, small businesses contributed 55% of the total net job creation.

While the wealth generated from the rising U.S. stock market is continuously acquired by affluent households, the middle and lower classes not only do not benefit from the wealth effect but also bear the debt burden of rising interest rates and the consumption pressure of rising inflation. From a political perspective, a stock market decline would lead to a more "equal" distribution of social wealth: the debt burden on the middle class would decrease, and the living costs for the working class would lower, benefiting most people while relatively harming a small portion. For Trump, it is better to let the bubble burst and the problems be exposed early to better build consensus, promote reform, and prepare for economic and market recovery before next year's midterm elections.

Trump has evolved from a 1.0 "businessman mindset" to a 2.0 "politician mindset." During the 1.0 period, due to the need for re-election, he focused on short-term views and cared more about the short-term feelings of the capital market. In the 2.0 period, theoretically without re-election opportunities and due to age reasons, his focus began to shift to the long term, with the emphasis on ensuring that U.S. Treasury bonds do not default in the long run, maintaining a strong dollar system, and restoring the U.S. as a manufacturing country.

Therefore, the short-term economic recession and adjustment of the U.S. stock market are both what he refers to as "detoxification" and the cost of reform and transformation. Moreover, the economic recession forces the Federal Reserve to cut interest rates, and the recovery of asset-liability ratios for middle-class families and small and medium-sized enterprises will also add momentum to the subsequent recovery of the U.S. economy.

In terms of timing, if the economic recession occurs in the second or third quarter of this year, the U.S. economy may begin to recover by the end of the year, when interest rates and inflation have already declined. Coupled with tax reduction policies and the fiscal space saved by DOGE, this would provide a very favorable foundation for the 250th anniversary of the United States in mid-2026 and the midterm elections in November. For Trump, the key to the above path is to control the timing of a mild short-term recession; otherwise, crises may follow one after another.

V. Recession is not a crisis; liquidity is, and the Federal Reserve is still "watching coldly"

If Trump insists on reducing the trade deficit and artificially blocking the dollar circulation path, it will reduce the scale of dollars abroad, thereby suppressing the investment demand for U.S. stocks and bonds, and also forcing overseas investors who "voted with their feet" in the past two years to reconsider their choices. The "triple kill" of dollar assets in early April is proof of a liquidity crisis.

After the sharp decline caused by tariffs and recession, many investors are waiting for the arrival of the Fed Put.

Historically, there have been many cases where the Federal Reserve stepped in to provide liquidity support after significant stock market declines, such as the "Black Monday" in the fall of 1987, several rounds of QE after the 2008 financial crisis, and the "unlimited QE" after the stock market circuit breaker in 2020However, during the inflation cycle in 2022, the Federal Reserve did not heed the market and continued to raise interest rates aggressively, leading to the failure of Fed Put expectations.

On April 17, Federal Reserve Chairman Jerome Powell stated in a speech at the Chicago Economic Club:

"Tariff policies are highly likely to lead to a temporary rise in inflation, and the impact of inflation may also be more lasting."

When asked whether the Federal Reserve would intervene to cut interest rates if the market crashed, Powell replied "no" and explained: "In the face of the uncertainty related to the rapid changes in tariff policies, the market is functioning normally and in an orderly manner."

Determining whether a one-time price increase due to tariffs will evolve into sustained inflation inherently involves a certain lag. Due to the trade-off between the economy and inflation, the data-driven Federal Reserve finds it difficult to cut rates preemptively, and when inflation falls back, it has already accounted for the actual recession phenomenon of declining real consumption by residents.

When both Trump Put and Fed Put expectations fail, any signs of recession in the U.S. economy could signal a red light for U.S. stocks.

Authors of this article: Song Xuetao, Chen Hanxue, Source: Xuetao Macro Notes, Original title: "Song Xuetao: U.S. Stocks Have Entered the 'Trump New Cycle'"

Risk Warning and Disclaimer

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