"Stagflation" 2H25 vs "Winning Big" 2026, Should the US Stock Market Rise or Fall?

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The tech giants centered around Meta and Microsoft have not disappointed, and even Apple, which has been performing weakly for some time, has delivered a stable report. However, the actual result is that, except for companies that significantly exceeded expectations, most companies have seen declines after releasing their earnings this season (see the chart below).

Essentially, as Dolphin Research previously mentioned, the market has priced in good performance due to previous gains, leading to overvaluation, where any minor disturbance becomes a negative factor. Recent disturbances remain at the macro level, not deviating from the three key points in the Strategy Weekly Report: fundamentals, U.S. Treasury liquidity, and Federal Reserve rate cuts.

Last week, there were clear developments in these three areas, detailed as follows:

1. Debt Issuance Comes First

First, let's talk about the pace of fiscal debt issuance: Trump's "One Big Beautiful Bill" (mockingly referred to as One Big Beautiful Bubble) raised the U.S. debt ceiling to $41 trillion, and last week the U.S. Treasury updated its debt issuance schedule.

Total Amount: According to the new plan, the net debt issuance for the third quarter is exactly as Dolphin Research estimated last week, a full $1 trillion, with the Treasury aiming to increase the account balance to $850 billion by the end of the third quarter; the fourth quarter will see a net issuance of another $590 billion.

Structure: The issuance volume for the medium to long-term (2-30 years) remains consistent with the second quarter, with no changes; inflation-protected TIPS have seen a slight expansion; Treasury bills T-bills have been issued in large quantities. The debt issuance structure is consistent with the original forecast, as the Treasury evidently believes current interest rates are too high and plans to issue medium to long-term debt once rates decrease.

Looking at TGA Reconstruction Progress: Last week saw a net increase of less than $90 billion, with the account balance restored to $410 billion. This $90 billion primarily came from a reduction in bank reserve balances, with a small portion from a decrease in the Federal Reserve's reverse repo balance.

Next, we need to observe the market disturbances caused by debt issuance liquidity.

2. Rate Cuts Not Yet Arrived

Last week's Federal Reserve meeting showed no movement in the July interest rate expectations. Although two committee members cast rare dissenting votes, Powell's overall stance remained "hawkish." For example, Powell addressed several key concerns:

a. The baseline assumption for tariff impact on prices is a one-time price increase, but initial signs of rising commodity prices have been observed, and qualitative research indicates that importers and retailers are considering passing tariff costs onto consumers, requiring time to observe if they will actually do so.

b. There is no preset expectation for a rate cut in September.

The Key is Prices Still "Inflating": The core PCE price index, which the Federal Reserve values, continued to rise in June, with a month-on-month increase of 0.26% corresponding to an annual increase of 3.2%, significantly higher than the Federal Reserve's long-term price target of 2%.

Awkward Employment "Stagnation": In stark contrast to price "inflation," the latest non-farm employment data is quite bleak: first, May's non-farm employment was revised down from 139,000 to 19,000, June's from 147,000 to 14,000, and July's increase was only 73,000.

Although non-farm employment figures are adjusted each time, the extent of these revisions is indeed exaggerated. If the data reflects actual employment conditions, it is clearly not the "soft landing" priced by the market, but rather a "hard landing."

Weak Domestic Demand: The U.S. GDP in the second quarter seemingly grew by 3%, but in reality, looking at private domestic demand—corporate investment + residential demand (excluding changes in corporate inventory due to tariff disturbances, only considering corporate fixed asset investment)—annual growth was only 2%, indicating that the intrinsic momentum of U.S. economic growth is weakening.

Putting the three figures together: price "inflation," employment "stagnation," and domestic demand "weakness," the combined economic state resembles "stagflation," rather than a 3% overall GDP growth.

However, the current market has actually ignored the prospect of high interest rates persisting in the second half of this year, directly pricing in next year's "tariff war victory (tariff revenue converted to resident tax cuts + FDI direct investment) + fiscal easing + monetary easing" driven "inflationary economic growth," and the asset frenzy prospects in such a scenario.

But if the reality is stagflation—prices rising, employment not increasing, and the economy not growing—assets indeed need to be adjusted. However, due to the political maneuvering of macro data and the exaggerated extent of downward revisions, the market's trust in some macro data is declining.

And the most genuine micro data—a series of U.S. stock earnings reports—forms an economic puzzle, especially with the generally decent revenue growth of various advertising platforms, suggesting that the second-quarter economic situation may not be very poor.

Especially, the U.S. has initially succeeded in tariff negotiations, with the market quickly forming a narrative logic of "additional tariff revenue in 2026 becoming additional resident and corporate spending, while dollars earned by trade partners flow back to the U.S. in the form of FDI" (the dollar starts to rise again under this logic).

Therefore, last week the market saw a correction, but the extent was not large; however, with the overall U.S. stock market at a high level, the positive effects of the earnings season have mostly passed, leaving the issues of U.S. Treasury issuance and macro data maneuvering. Dolphin Research believes that in the short term, U.S. stocks still pose more risks than opportunities.

3. Portfolio Returns

Last week, Dolphin Research's virtual portfolio Alpha Dolphin did not adjust its holdings. The portfolio fell by 1.5% during the week, outperforming benchmark market indices—CSI 300 (-1.8%), Hang Seng Tech (-4.9%), MSCI China (-3.4%), and S&P 500 (-1.5%).

Since the portfolio began testing (March 25, 2022) until last weekend, the portfolio's absolute return was 92.6%, with an excess return of 86.4% compared to MSCI China. From an asset net value perspective, Dolphin Research's initial virtual asset of $100 million exceeded $196 million by last weekend.

4. Individual Stock Profit and Loss Contribution

Last week, Dolphin Research's virtual portfolio Alpha Dolphin outperformed market indices mainly due to its current configuration structure being more allocation-oriented, with a high proportion of gold + cash + U.S. Treasury bonds.

The main explanations for individual stock price movements 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 underweighted. Assets outside of equity are mainly distributed in gold, U.S. Treasury bonds, and U.S. dollar cash, with the current ratio between equity assets and defensive assets like gold/U.S. Treasury/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

This week, the earnings reports of U.S. stock giants come to a close, and a series of niche leaders covered by Dolphin Research begin to release their earnings intensively. In semiconductors, focus on AMD to see if it can provide guidance beyond expectations after CSP giants have generally raised capital expenditures.

Additionally, niche giants like Disney, Uber, Airbnb, and Block can provide insights into the progress of the U.S. economy through earnings reports and conference calls; software stocks like Palantir, Shopify, Unity, and Applovin can observe the progress of AI applications on the SaaS side. Among Chinese assets, mainly focus on SMIC to see how long this traditional semiconductor cycle will last.