CITIC Construction Investment: Is it really cold at the heights of the U.S. stock market? The probability of a short-term decline in the U.S. stock market has not increased after each new high

According to the Zhitong Finance APP, CITIC Construction Investment Securities released a research report stating that after the S&P 500 peaked in mid-February, it experienced two significant declines in early March (DeepSeek impact) and early April (tariff impact). Subsequently, the U.S. stock market began a recovery process, and under the catalysts of trade easing, interest rate cut expectations, and economic resilience, it reached a new historical high this week. Historical experience shows that after each new high, the probability of a short-term decline in the U.S. stock market does not increase, but considering seasonal, economic, and profit valuation dimensions, a pullback around August cannot be ruled out, which may provide a better entry window.

The main points of CITIC Construction Investment are as follows:

1. After the U.S. stock market reaches a new high, does the risk of short-term adjustment significantly increase? No, in fact, it is quite the opposite.

Historical experience shows that after a new high, the upward space of the U.S. stock market is indeed suppressed, but the risk of decline is not significantly affected, and the probability of a large drop actually decreases.

(1) In the 1-3 months after a new high, both the upward space and the probability of a significant rise are significantly lower than in other periods, especially within the first month.

(2) In the 1-3 months after a new high, the decline magnitude does not differ much from other periods, but the probability of a drop of more than 5% is lower, and the timing for the onset of a drop of more than 5% is also later.

(3) After a drop of more than 20% + a new high, on average, a short-term consolidation is more likely to occur, but the variance of actual cases is large, with both continued large rises and large drops possible.

(4) At each new high, it does not necessarily correspond to extreme high levels of long positions in derivatives, and often occurs at phase bottoms; currently, net long positions are again at a low level.

Overall, there is no need to be overly concerned about the short-term trend of the U.S. stock market simply because of a new high. With the long-term upward trend of the U.S. stock market, new highs have gradually become normalized; therefore, it is recommended to assess the subsequent short-term risks from other perspectives.

2. Around August, the U.S. stock market has a certain seasonal decline pattern, with many uncertainties such as mid-year earnings, economic weakness, and fiscal monetary factors that still need to be closely monitored.

Historical patterns show that the U.S. stock market tends to adjust in Q3. From 2022 to 2024, events such as accelerating inflation, U.S. Treasury supply turmoil, yen carry trade reversal, and weakening employment have all caused significant declines in the U.S. stock market around August. Potential catalysts that may threaten the U.S. stock market this summer include:

(1) Under the backdrop of weakening economic data, profit expectations remain under pressure, with forward valuations only 1.9% away from the high point at the beginning of the year.

(2) Recently, the market has been immune to fiscal debt issues, and the Federal Reserve's interest rate cut expectations are extremely optimistic. If a deficit increase or rising inflation occurs in the third quarter, the market narrative logic may reverse at any time.

(3) Potential volatility in overseas markets, such as UK pensions, yen carry trade reversal, and U.S. dollar depreciation.

3. Summary: N-shaped trend, limited short-term cost-effectiveness, and adjustments in Q3 cannot be ruled out, which may be a more suitable entry opportunity.

(1) New highs ≠ a sharp increase in short-term decline risk, and with low long positions in derivatives and no clear negative factors temporarily, U.S. stock market momentum may partially continue within one month, but based on historical experience and forward valuations, the subsequent space may be around 2%, making the cost-effectiveness of increasing positions not high (2) The downward revision of U.S. stock earnings may be the main contradiction in the second half of the year. Around August, when seasonal declines are likely, the negative impact of tariffs will become apparent, tax cuts will catalyze deficits, and the earnings report season will occur, making market sentiment more sensitive. A repeat of the summer decline scenario cannot be ruled out.

(3) After waiting for the uncertainties of summer to settle, the shift of earnings expectations from 2025 to 2026, combined with the potential decline window in Q3, will be an appropriate time to re-enter the U.S. stock market.

Risk Warning:

U.S. inflation exceeds expectations, U.S. economic growth exceeds expectations, leading to continued tightening of Federal Reserve monetary policy, significant appreciation of the U.S. dollar, rising U.S. Treasury yields, continued decline of U.S. stocks, a banking crisis, and the emergence of currency and debt crises in emerging markets. A U.S. economic recession exceeding expectations could lead to a liquidity crisis in financial markets, forcing the Federal Reserve to shift to easing. An unexpected European energy crisis could plunge the Eurozone economy into deep recession, causing global market turmoil, shrinking external demand, and policy dilemmas. Global geopolitical risks are escalating, U.S.-China relations deteriorate beyond expectations, uncontrollable factors emerge in commodities and transportation, the degree of de-globalization deepens, supply chains continue to be disrupted, and competition for related resources worsens