Guotai Junan Securities: The value storage function of U.S. Treasury bonds has weakened, and the investment rating for U.S. stocks has been downgraded to "underperform the market."

According to the Zhitong Finance APP, Guosen Securities released a research report stating that as the U.S. fiscal deficit continues to worsen, the function of U.S. Treasury bonds as a store of value is being replaced by gold. The bank's investment recommendation is: the 20-year U.S. Treasury yield target range for 2025 is 4.9%-5.2%, and it is advised to avoid; the target price for gold is $3,500 per ounce, and if its market value catches up with U.S. Treasury bonds, it will reach $4,400 per ounce, and it is recommended to increase holdings. At the same time, it has estimated the target price for the S&P 500 in the second half of 2025: 5,600 points (optimistic) - 5,200 points (baseline) - 4,300 points (pessimistic). The investment rating for U.S. stocks has been downgraded from "neutral" to "underperform."

The main points of Guosen Securities are as follows:

U.S. Treasury bonds lose their store of value function, gold will take their place

After the collapse of the Bretton Woods system, the reserve currency system of the U.S. dollar was jointly constructed by the dollar and U.S. Treasury bonds. The dollar serves as a medium of exchange, while U.S. Treasury bonds serve as a store of value. As the U.S. deficit spirals out of control, the latter has lost its original function and has been replaced by gold. The valuation of U.S. Treasury bonds has decoupled from that of gold, U.S. stocks, and other assets.

This means, in terms of pricing: 1) U.S. Treasury bonds will shift from premium assets to discounted assets. Historically, the yields on U.S. Treasury bonds have been long-term below reasonable valuations (expected inflation + expected economic growth); in the future, reasonable valuation may become the lower limit of yields. 2) The total market value trends of gold and U.S. Treasury bonds have been consistent in the long term, but the former has been long-term below the latter. In the future, as U.S. Treasury bonds are replaced by gold, the total market value of gold should surpass that of U.S. Treasury bonds. 3) The risk premium between stocks and bonds will no longer constrain stock valuations.

Target price: The bank believes that the bottom line for the 20Y U.S. Treasury yield will be 4.35%, with a target yield of 4.9%-5.2% for 2025, and it is advised to avoid. During the same period, the target price for gold is $3,500 per ounce; if the market value of gold catches up with that of U.S. Treasury bonds, the price of gold will reach $4,400 per ounce, and it is recommended to hold.

The long bull market in U.S. stocks is driven by monetary factors, and this logic is hard to break

The long bull market in U.S. stocks is a monetary phenomenon: 1) From the perspective of capital flow, the long-term current account deficit in the U.S. must be balanced by a surplus in the capital account, which is why U.S. stocks always have overseas buyers; similar cases can be seen in India and the Indian stock market. 2) From the supply perspective, U.S. companies have been in a long-term net repurchase state since the 1980s, resulting in fewer stocks, which also drives up stock prices. 3) From a fundamental perspective, fiscal expansion means more government orders, higher inflation, and higher profit margins, benefiting U.S. stocks. Therefore, the long-term fiscal and trade deficits are actually favorable for U.S. stocks: the reduction in the DOGE deficit is less than expected, the "Big and Beautiful Act" has been introduced, and the trade war's lack of momentum will reinforce the logic of the long bull market in U.S. stocks.

However, short-term economic prosperity faces risks

Under the impact of the tariff war, the rise in commodity prices will not translate into income growth for residents as service prices do. The bank estimates that for every 10 percentage point increase in tariffs, the real purchasing power of residents' income will decline by 0.5 to 0.7 percentage points. On the other hand, U.S. consumer credit has seen negative year-on-year growth for two consecutive quarters, a phenomenon that historically often corresponds with a substantial recession In response to "economic contraction" and "substantial recession," the bank used an intrinsic earnings model to estimate the target price for the S&P 500 in the second half of 2025: 5600 points (optimistic) - 5200 points (baseline) - 4300 points (pessimistic). It downgraded the investment rating for U.S. stocks from "neutral" to "underperform."

Medium-term Choices for Hedging and Bottom Fishing

The bank is looking for clues from two perspectives: 1) Alpha and Beta; 2) Historical economic cycles and the rotation patterns during bull and bear market transitions. It suggests considering the following during the upcoming hedging phase: 1) Quality factors can be both offensive and defensive; 2) Dow Jones, dividend factors, utilities, and consumer staples as pure defensive choices; 3) Nasdaq 100 can use Alpha to hedge a small amount of risk while preventing missing out, but it is insufficient to combat substantial recession.

For future bottom fishing, it recommends: first, Philadelphia Semiconductor; second, Nasdaq 100, Nasdaq Composite, Russell 2000, small-cap growth, and information technology sector.

Risk Warning: Uncertainty in U.S. foreign and trade policies; uncertainty in U.S. fiscal policies; uncertainty in the global political and economic landscape; the possibility that historical patterns may not repeat in the future