Guotai Haitong: The expectation of the Federal Reserve's interest rate cuts may further narrow, and there is still upward space for US stocks

According to the Zhitong Finance APP, Guotai Haitong released a research report stating that the U.S. GDP in the second quarter exceeded expectations, with the main supports being the decline in "import grabbing," resilient consumption, and the return of manufacturing investment. It is expected that the U.S. economy will remain resilient going forward, and as tariffs gradually reflect in inflation, the expectations for Federal Reserve interest rate cuts may further narrow. In July, the Federal Reserve's interest rate meeting remained unchanged, but internal divisions have increased, and the independence of the Federal Reserve is likely to be maintained. The central rate of U.S. Treasury yields may further rise, and the U.S. stock market still has upward space.

The main points from Guotai Haitong are as follows:

The U.S. GDP growth rate in the second quarter exceeded expectations, mainly supported by the decline in imports, resilient consumption, and private non-residential investment.

In the second quarter of 2025, the U.S. GDP annualized growth rate reached 3.0%, higher than the market expectation of 2.6%, and significantly above the previous value of -0.5%. The unexpected support for the U.S. GDP annualized growth rate in the second quarter mainly came from the decline in "import grabbing," resilient consumption, and the return of manufacturing investment, while the main drag came from changes in private inventories, private residential investment, and exports of goods and services. Looking ahead, the bank believes that:

First, as "import grabbing" significantly weakens, the support from the decline in imports will diminish; second, the wealth effect from the capital market will continue to support resilient consumption; third, the return of manufacturing will further strengthen; fourth, the drag from changes in private inventories will ease. Therefore, overall, the resilience of the economy can still be maintained, and concerns about a U.S. economic recession can basically be refuted, while attention should be paid to the risks of economic upside.

On July 30, 2025, Eastern Time, the Federal Reserve released a statement from its interest rate meeting, followed by Powell's routine press conference. From the statement and Powell's remarks, the bank believes there are three marginal changes:

First, the Federal Reserve remains unchanged, but divisions have increased. In this interest rate decision, two Federal Reserve governors (Waller and Bowman) opposed maintaining the interest rate unchanged and supported a 25 basis point cut, reflecting an increase in internal divisions within the Federal Reserve.

Second, the Federal Reserve expressed greater uncertainty regarding the economic and inflation outlook. The statement from the Federal Reserve's interest rate meeting changed from "the uncertainty of the economic outlook has somewhat diminished" to "the uncertainty of the economic outlook still exists." Regarding inflation, Powell believes that tariffs are beginning to reflect in consumer prices, and inflation data is expected to be more affected by tariffs.

Third, Powell reiterated the independence of the Federal Reserve, still providing vague forward guidance but expressing a somewhat "hawkish" stance. Powell reaffirmed the independence of the Federal Reserve, stating that decisions should be based on data rather than politics, thus providing vague guidance regarding a potential rate cut in September, indicating that decisions will still be made based on data. Overall, Powell's stance is somewhat "hawkish," and market expectations for rate cuts throughout the year have further declined.

Expectations for rate cuts throughout the year are further narrowing, U.S. Treasury yields are rising, and the U.S. stock market still has space.

In the short term, U.S. inflation data has not fully reflected the impact of tariffs, and it is expected that rising inflation will continue to hinder rate cuts, with caution advised regarding further narrowing of rate cut expectations. After the July 2025 Federal Reserve interest rate meeting, the U.S. federal funds futures market reflected a narrowing of rate cut expectations to only one cut in October, which is consistent with the bank's previous expectations. The bank warns that further narrowing of rate cut expectations may occur, and there is even a risk of no rate cuts throughout the year, which could cause temporary disturbances to U.S. Treasuries and stocks It is expected that Trump's global tariffs will lead to a further rise in inflation expectations, combined with subsequent tax cuts, an increase in the debt ceiling, and more economic policies to stabilize the economy. The expectations for interest rate cuts may further narrow, and U.S. Treasury rates are likely to be difficult to decrease. It is anticipated that the 10-year U.S. Treasury yield will fluctuate at a high level in the range of 4.5%-5.0% in the second half of the year. U.S. stocks may experience periodic fluctuations in the second half of the year, but this will not change the overall upward trend. U.S. tech stocks still have support, especially in areas such as AI semiconductors, where both capital expenditures and performance are supported. If Trump's tax cut policy is implemented, it will be more beneficial for small and medium-sized enterprises.

Risk Warning: U.S. tariffs exceeding expectations could lead to a significant economic downturn and a sharp rise in inflation; the return of U.S. manufacturing could pose an upward risk to the manufacturing cycle; the independence of the Federal Reserve continues to be challenged by Trump