Rising Performance, Flat Prices: U.S. Equities—Risk or Chance?

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In the previous Strategy Weekly Report, Dolphin Research mentioned that Trump's "One Big Beautiful Bill" and the subsequent replacement of the Fed Chairman have basically confirmed the prospect of dual easing policies of loose fiscal and monetary policies next year. Coupled with the generally smooth progress of global trade tariffs, the U.S. stock market has already begun to celebrate the promising outlook for next year.

However, as U.S. stocks hover at high levels, there are three major challenges to face in the second half of this year—fundamentals, Federal Reserve rate cuts, and the pace of U.S. debt issuance. This week, Dolphin Research will focus on these three points to look at the latest developments:

1. Fundamentals: Overpriced, top performers can at most maintain stock prices from falling

Starting with the micro-level individual stock earnings season: From the first company to report earnings, Netflix, Dolphin Research sensed that Netflix might be a replica of most internet companies this earnings season—revenue outlook upgrades are within expectations (performance upgrades due to dollar depreciation are not considered positive), and any slight flaw in profit guidance could lead to a stock price drop. And indeed, this is largely the case:

Tesla's current performance is better than the bleak expectations, Google's advertising/cloud business is impressive, and Coca-Cola's organic growth and profit excluding exchange rates are also outstanding. However, the stock price performance after earnings has been quite average.

Other companies not covered by Dolphin Research, such as SAP in the software sector, had poor performance, leading to a sharp decline in the entire sector; NXP Semiconductors in the automotive semiconductor sector also had poor performance, causing the entire sector to adjust.

And the so-called "solid" earnings reports mostly just maintain the stock price from falling, while poor performance directly results in a drop of around 10 percentage points. Most of the time, funds are looking for flaws in earnings reports to take the opportunity to sell off.

Essentially, this is because the market pricing is already too saturated. If individual stocks cannot achieve a significant outperformance to boost long-term outlook, the high probability direction is to hover at high levels or see a stock price decline.

As of now in the earnings season, the macroeconomic reflected by the advertising industry is also stable, mutually verifying with macro data—U.S. retail sales in June began to recover after two months of weakness.

From a fundamental perspective, whether macro or micro, the overall risk is not significant. The problem, clearly, lies in pricing, where the market's pricing of stock prices is too saturated, making further upward movement too difficult.

2. Rate cuts and debt-issuance spreads: which will come first?

With fundamentals relatively stable, the main forces that can change the direction of U.S. stocks now are twofold—what are the expectations for rate cuts? How strong is the spread on debt issuance? One helps the stock market rise further, while the other, in the short term, will siphon off liquidity during debt issuance, but if the actual effect is loose fiscal policy, funds invested in the real economy will eventually trigger an asset bubble.

The main impact is on the judgment of investment rhythm: in the short term, should one lock in profits or wait for rate cuts to exceed expectations, pulling assets further up? But in any case, if we look to next year, under loose fiscal and monetary policies, the outlook for U.S. stocks remains optimistic.

a. The big showdown, can Powell hold on?

From Trump to Bessent to various congressmen, more and more politicians are pressuring for rate cuts, with increasingly diverse tactics: from threats of dismissal, to corruption in the FED building renovation, accusing Powell of perjury, to "resetting" the financial regulatory system, accusing the Federal Reserve of being a bunch of PhDs talking on paper.

From Powell's current statements, the probability of succumbing to pressure is low. But Powell is only 10 months away from the end of his term as chairman next year, and at 72 years old, he is already at retirement age, caught between voluntarily resigning and holding on, at most insisting on his "late festival."

And from the current fundamentals, with core prices excluding housing costs starting to rebound from the bottom, the prudent approach of not cutting rates in July is the most stable.

Therefore, the key to this week's upcoming The Federal Open Market Committee is not the July decision, but Powell's assessment of the current economic state, changes in tone, and whether there will be any change in his stance on Trump's extreme pressure. Is there a possibility of Powell's attitude softening (probability is low), leading to larger and faster rate cuts in the future.

b. How much rate cut is the market currently expecting?

From the pricing of Federal Reserve futures funds, the rate cut expectations for 2025 are basically in line with the Federal Reserve's guidance—3.89%. But entering 2026, the market begins to expect the Federal Reserve's benchmark rate to quickly decline, reaching 3% by the end of 2026. In contrast, the Federal Reserve's guidance released in June was 3.6%.

It can be seen that the market expects that in 2025, the Federal Reserve is still under Powell's leadership, meaning it has not priced in Powell's early resignation in 2025. Therefore, Dolphin Research emphasizes the need to observe Powell's rhetoric to see if he can withstand the pressure. If Powell resigns early, it would still boost the market, as it would mean the market needs to price in earlier and faster rate cuts.

But entering 2026, even if Powell has not yet stepped down, his influence on rate expectations will decline, and the rate expectation trajectory will actually be controlled by the "shadow Fed chairman." And once the new Fed chairman takes office, the U.S. benchmark rate will head south, reaching 3% by the end of the year.

Note, however, that from the results, Dolphin Research believes the market's expectations are clearly too optimistic because:

1. The fiscal stimulus effect of the One Big Beautiful Bill in 2026 will officially manifest;

2. Tariff rates have structurally increased;

3. If there is indeed another 3% rate policy, relaxed bank capital regulation, and the new Federal Reserve exits quantitative tightening.

Therefore, the likely scenario for 2026 is—inflation, or debt inflation.

An especially interesting point is that from the extreme pressure on Powell, Trump's goal is to balance the U.S. federal government's balance sheet, reduce interest payments, without considering the damage to the last "gatekeeper" of the dollar's credibility—the independence of the Federal Reserve.

And from past situations, if a Federal Reserve completely obedient to the White House does appear, dollar depreciation, gold, virtual assets, and other assets with alternative dollar reserve functions are likely to rise in value. Of course, in this process, stocks are also inflationary assets.

Overall, Dolphin Research believes that in the short term, whether Powell resigns, and with the market already expecting a compliant Federal Reserve to cut rates all the way in 2026, the probability of rate cuts exceeding expectations next year has diminished, unless Powell himself softens his tone. Therefore, with the market already trading on rate cuts, it is difficult to further stimulate stock prices with the rate cut story.

c. But spread on debt issuance is a certainty

Now that July is over, according to the U.S. Treasury's July 8 document, the Treasury General Account (TGA) needs to be replenished to $500 billion by the end of July, reaching a desired level of $850 billion before September.

But as of the week ending July 21, the TGA was still at $330 billion, meaning that from now until the end of September, the TGA replenishment needs to siphon off $520 billion from the market; at the same time, for the U.S. fiscal year 2025 (ending September 30), the Congressional Budget Office (CBO) estimates the U.S. deficit for this fiscal year is $1.9 trillion, with $1.3 trillion as of June, meaning the U.S. federal fiscal deficit in the third quarter will be $500-600 billion.

By the end of September, the net issuance of U.S. Treasury debt will roughly equal the TGA replenishment amount plus the new deficit amount, which is between $1 trillion and $1.1 trillion. In other words, in the two months after the earnings season ends, August and September, the federal fiscal will essentially net siphon off around $1 trillion in market funds.

And from excess liquidity—the Federal Reserve's reverse repo balance, the current level can only provide $200 billion in funds, the remaining $800 billion will still be siphoned from bank reserves, even if the issuance structure is mainly short-term Treasury bills (4-week, 6-week, 8-week), large-scale siphoning of bank reserves in one or two months may trigger a correction in the already high U.S. stock market.

Therefore, overall, due to high stock prices, even good performance makes it increasingly difficult to drive stock prices up; and on the Federal Reserve issue, the upward support that the rate cut narrative can provide is relatively limited in the short term; but more certain is that in the next 1-2 months, the U.S. debt issuance wave will arrive, and if siphoning occurs, the risk of downward adjustment in U.S. stocks is significant.

Of course, after the correction, facing the inflation outlook for 2026, U.S. stocks, along with gold and virtual assets (especially if the independence of the Federal Reserve is challenged), remain relatively good asset choices.

Here is a special reminder that this week's The Federal Open Market Committee , non-farm employment data, and the U.S. Treasury's quarterly refinancing plan are very important and need to be closely watched.

3. Portfolio Returns

Last week, Dolphin Research's virtual portfolio Alpha Dolphin did not adjust its positions, rising 0.5% for the week, underperforming the benchmark market indices—CSI 300 (+1.7%), Hang Seng Tech (+2.5%), MSCI China (+2.8%), and S&P 500 (+1.5%).

Since the portfolio began testing (March 25, 2022) until last weekend, the portfolio's absolute return is 95.4%, with an excess return of 85.5% compared to MSCI China. From an asset net value perspective, Dolphin Research's initial virtual asset of $100 million has exceeded $198 million as of last weekend.

4. Individual Stock Profit and Loss Contribution

Last week, Dolphin Research's virtual portfolio Alpha Dolphin underperformed the market indices, a. partly due to the poor performance of some consumer staple stocks in the portfolio, b. the concentration in U.S. internet assets, and during the earnings season, the positive logic of internet assets was realized, and the market began to rotate to cyclical industries with slightly lower valuations.

The main explanations for the rise and fall are as follows:

5. Asset Portfolio Distribution

The Alpha Dolphin virtual portfolio holds a total of 18 individual stocks and equity ETFs, with 7 standard allocations and the rest underweight. Assets outside of equities are mainly distributed in gold, U.S. debt, and U.S. dollar cash, with the current ratio of equity assets to defensive assets such as gold/U.S. debt/cash being approximately 53:47.

As of last weekend, the Alpha Dolphin asset allocation distribution and equity asset holding weights are as follows:

6. Key Events This Week

Starting this week, the U.S. earnings season enters its peak, which is another critical week to verify Dolphin Research's previous judgments. If good performance cannot effectively drive individual stocks up, the risk of high valuations is almost confirmed, and changes in macro expectations and policies become extremely important.

This week, giants like Apple, Amazon, and Microsoft, in addition to observing their own performance, it is equally important to look at capital expenditure adjustments to see if there will be situations like Google's large capital expenditure increase. Other smaller giants like ARM, Spotify, Roblox, and Robinhood also need to be closely watched.