The road is paved! 2026: Just waiting for a Trump-style 'Artificial Bull'?

It may seem that Trump's Treasury Secretary Besent is at odds with the Federal Reserve, but in reality, when it comes to actual matters, the two departments that hold the economic lifeline are still 'closely aligned.'

By the end of September, the Federal Reserve had cut interest rates as expected, and the Treasury's TGA rebuilding was also nearly complete. However, all these events occurred when the U.S. stock market was at a new high. What will drive the U.S. stock market to new heights in the future?

In this article, Dolphin Research will help everyone sort out what kind of combination the macro environment has reached by 2025 and what it indicates for the future.

I. Federal Reserve: Preventive Rate Cut

First, let's look at monetary policy. At the FOMC meeting on September 17, the Federal Reserve lowered interest rates by 25 basis points as expected, reducing the federal funds rate from 4.25-4.5% to 4%-4.25%.

More interestingly, in the FOMC's economic forecast update, FOMC members raised their economic growth expectations for the next three years and the inflation expectations for 2026, but lowered the policy rate and unemployment rate.

This means that in 2025, apart from better GDP, everything else remains unchanged; starting in 2026, inflation slightly rises, but GDP growth expectations and unemployment rate expectations are improving.

Under such positive expectations, the Federal Reserve cut interest rates by 25 basis points, and the reason for the rate cut was clearly explained: mainly because employment was worse than originally expected.

According to the Federal Reserve's explanation, this discrepancy is not just due to reduced supply caused by immigration but also because job demand is decreasing faster, leading to a slow rise in the unemployment rate. Although the current unemployment rate is still healthy, a preventive rate cut is needed to stimulate corporate job demand and prevent further deterioration in employment.

So the core points are: preventive rate cut in a situation where the economy is not problematic.

Moreover, it is clear that the market is not pricing in a recessionary rate cut. Unlike the dual rate cut of short and long bonds in August 2024, in this round of rate cut cycle, the 2-year U.S. Treasury yield dipped to the 3.5%-3.6% range, but the long-term bond yield (benchmarked by the 10-year U.S. Treasury yield) declined very slowly, and after stabilizing around 4.2%, it stopped declining and started to rise.

This means that the restart of the rate cut cycle in 2025, from the current perspective, whether from:

a. The outlook for the U.S. policy mix in 2026: loose fiscal + loose monetary policy to support the midterm elections in 2026;

b. Current economic progress: CPI is still rebounding from the bottom, and social consumption is not bad—U.S. retail sales in August grew by 0.63% month-on-month, and core retail sales excluding motor vehicle parts, gas stations, and building materials grew by 0.72% month-on-month, showing very good performance.

This means that currently, only new employment performance is weak and weekly working hours are weak (new employment is related to reduced immigration, and weekly working hours may be related to increased AI penetration), while other aspects, whether in terms of resident consumption or employee wage growth, are showing very stable performance.

c. Or the current AI technology-driven CAPEX super cycle.

Combining these three factors, the effect of this rate cut seems to be adding fuel to an already good economic foundation, ensuring that the economy does not 'land' next year.

II. U.S. Treasury: 'Speculative' Bond Issuance

Dolphin Research mentioned in last week's strategy weekly report that originally, by mid-September, the U.S. federal fiscal development's liquidity withdrawal was increasing, and the market's short-term liquidity pressure would increase, creating a risk of market correction.

However, with the cooperation of monetary and fiscal policies, this risk seems to have been safely navigated: last week, taking advantage of the Federal Reserve's preventive rate cut, the Treasury quickly raised funds, directly replenishing the TGA account by $140 billion in a single week (the increase peaks in late January and early April 2025 are more related to the resident tax season).

By the end of the week on the 17th, the U.S. federal fiscal TGA account balance had risen from $670 billion the previous week to nearly $810 billion, just a short distance from the end-of-September target of $850 billion. With more than a week left to make up the remaining $40 billion, it is unlikely to cause effective market disruption.

Thus, starting from mid-July, after two and a half months of bond issuance and financing, the TGA account rebuilding was basically completed by September. Through a series of skillful operations, this year's TGA account rebuilding did not lead to a significant correction in the U.S. stock market. Moreover, during the rebuilding process, through favorable news from tariff negotiations and precise employment data to feed the Federal Reserve's decision-making mechanism, the Federal Reserve was smoothly led to a preventive rate cut, stimulating the market and allowing the U.S. stock market to achieve a volatile upward trend during the rebuilding process.

<I—II> In summary, regardless of how dissatisfied the Treasury appears with the Federal Reserve, the result still seems to be a public confrontation and private cooperation, resulting in a dignified rate cut by the Federal Reserve, a dignified bond issuance by the Treasury, and the market ultimately moving upward, safely navigating through September.

III. Hidden Reefs Passed, Smooth Sailing Ahead?

Clearly, the most pressing question for the market now is similar to a question raised to Powell at the latest FOMC meeting: 'With all major indices at new highs, will rate cuts fuel a market bubble?'

The market's question is similar: With the TGA rebuilding completed, the rate cut cycle started, tariffs high and light, tax and fee reduction policies in place, combined with a major AI infrastructure cycle, this combination does not seem to indicate a recessionary outlook for 2026.

Instead, it seems more like an economic outlook where the economy may overheat and prices may rise again. However, Dolphin Research mentioned in last week's weekly report that according to Trump's 2026 election preservation, a combination policy of price control + hard control of the FED may be factually adopted, making 2026 look more like a 'man-made economic boom' before the election.

In other words, the 2025 groundwork laid by the Trump administration for 2026 is more like the 'first half of the Nixon era': a 'prosperous scene' of controllable prices, full employment, stable income, and economic prosperity.

In this situation, the environment of loose fiscal and monetary policies remains a hotbed for growth stocks, with every corner of AI stocks (from computing power, storage, network, equipment, energy, to algorithms and applications) still having opportunities for speculation. The U.S. stock market in 2026 may be more like an asset feast driven by technology + growth + policy.

Of course, the second half of the Nixon era's plot was soaring prices and a collapsing market. However, standing at the present, without uncontrolled inflation in 2026, funds will not price any second-half plot. Before that, it is more like a 'risk-on, party-on' mode.

Of course, with inflation not falling, the Federal Reserve's continued rate cuts in 2026 would be equivalent to devaluing the dollar. The expectation of a weaker dollar will still lead to capital outflows, seeking undervalued non-U.S. opportunities, thereby bringing higher elasticity to non-U.S. assets.

Overall, Dolphin Research believes that with major macro risks past, as long as there are no major fundamental issues, each round of correction may correspond to a higher upward space. Recalling the beginning of 2025, with the U.S. stock market at a high valuation and no fundamental issues, external fluctuations like tariffs would adjust and bring higher upward space, with valuations returning to the high point at the beginning of the year.

For the U.S. stock market in recent years, history has repeatedly verified that as long as there are no issues with U.S. stock EPS expectations, valuation corrections are more like opportunities rather than risks.

IV. Portfolio Returns

Last week, Dolphin Research's virtual portfolio Alpha Dolphin did not adjust its positions. It rose by 1% during the week, outperforming the CSI 300 (-0.4%), matching the MSCI China Index (+1%), but underperforming the Hang Seng Tech Index (+1%) and the S&P 500 Index (+1.2%).

Since the portfolio began testing (March 25, 2022) until last weekend, the portfolio's absolute return is 111%, with an excess return of 90% compared to MSCI China. From an asset net value perspective, Dolphin Research's initial virtual asset of $100 million has exceeded $213 million as of last weekend.

V. Individual Stock Gains and Losses Contribution

Last week, the main contributors to Dolphin Research's virtual portfolio Alpha Dolphin's gains were Ctrip, Bilibili, and Pinduoduo. Of course, the rise and fall of individual stocks have their reasons, but the major macro background is the U.S. rate cut, RMB appreciation, and USD depreciation, once again testing the 97-96 bottom range, corresponding to Chinese assets also starting to speculate on AI growth assets. In this situation, dividend stocks like China Mobile find it difficult to outperform the market.

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

VI. 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 equity are mainly distributed in gold, U.S. Treasuries, and USD cash, with the current ratio between equity assets and defensive assets like gold/U.S. Treasuries/cash being approximately 55:45.

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