U.S. stocks get off to a good start in fourth quarter, technology stocks surge higher inspired by AI

The recent market sentiment has been significantly affected by fluctuations in U.S. bond yields and oil prices. As U.S. bond yields fell from multi-year highs in recent days, U.S. stocks reversed their early losses on the first trading day in October, with major U.S. stock indexes closing in the red. Among them, the financial reports and outlook of major U.S. memory manufacturers related to the semiconductor theme were better than expected, and news of the listing of new AI startups boosted investment sentiment, supporting the rise of technology stocks and semiconductor stocks. However, rising oil prices and concerns about inflation still suppressed the market's gains.

Geopolitical and inflation headwinds remain, global economic resilience is better than expected

Returning to fundamentals, the global economic outlook continues to improve. Although inflation is still higher than the target level of central banks and headwinds such as geopolitics and energy price fluctuations have not completely subsided, overall economic activity has shown better than expected resilience. The market generally expects that the U.S. economy is expected to accelerate again on a stable basis, Europe's growth momentum is better than the market's original forecast, and China also has the opportunity to usher in a phased rebound in the fourth quarter, driven by policy support and stabilizing domestic demand.

U.S. stocks are off to a good start in the fourth quarter! Technology stocks surged higher, encouraged by the outlook for AI and semiconductors, but high oil prices restrained overall gains in the market. (Bloomberg)

Recently, the focus of global financial markets still revolves around the three main axes of inflation, interest rates and economic growth. Although U.S. economic growth slowed down in the second quarter compared with the previous period, it was mainly affected by inventory adjustments and external demand. Private consumption and service industry activities remained resilient. Although the retail sales data that the market is paying attention to has cooled slightly, it reflects a return to normalization of demand rather than a rapid economic weakening. On the other hand, the labor market is showing a wait-and-see pattern of "low recruitment, low layoffs, and low turnover", and both companies and workers still maintain a relatively cautious attitude.

Major central banks are still expected to raise interest rates, and the tightening of financial conditions is showing results

As the market gradually adapts to the higher interest rate environment, major central banks will continue to focus on curbing inflation. After raising interest rates in September, the market expects that the U.S. Federal Reserve (Fed), the European Central Bank and the Bank of Japan will still have room to further raise interest rates before the end of the year to prevent a rebound in energy prices and a resurgence of inflationary pressures. However, the rise in yields itself has significantly tightened financial conditions. To some extent, it has achieved some of the tightening effects for the Federal Reserve, and it has also given policymakers more room for observation and adjustment in the future.

It is worth noting that the U.S. 10-year Treasury bond yield has maintained a high level of volatility recently, causing the market to pay attention to interest rate risks. However, high interest rates do not necessarily mean that the financial market will face a crisis. What really requires vigilance is the simultaneous emergence of high interest rates and fragile financial structures. Regardless of whether it is viewed from the perspective of corporate profits, household balance sheets or the job market, although the U.S. economy has cooled down, it is still far from stalling, indicating that the overall fundamentals are still relatively sound.

Driven by the continued expansion of investment and AI-related capital expenditures, corporate profit performance remains solid and has become an important force supporting global stock markets. The market has recently been divided on the development of the AI ​​industry. Some people regard short-term fluctuations as layout opportunities, while others are worried about valuation and investment return risks. However, judging from the development history of the industry, AI is at a critical stage where technological breakthroughs and commercialization meet. The investment focus has gradually shifted from "whether it has the AI ​​theme" to "whether it can create substantial profits and cash flow."

Peak season boosts semiconductors, bonds and value stocks add allocation resilience

Looking forward to the market outlook, AI is still the most representative long-term growth theme, and the Asian semiconductor supply chain continues to benefit from global artificial intelligence, high-performance computing (HPC) and data center expansion needs. As the fourth quarter enters the traditional peak season of the technology industry and the momentum of corporate capital expenditures continues, the market still maintains a positive view on the profit prospects of the technology and semiconductor industries.

In terms of asset allocation, the high interest rate environment not only brings volatility, but also represents a new stage of repricing of yields. Compared with the ultra-low interest rate era in the past, investors now have more diversified allocation options, including investment-grade bonds, high-dividend stocks, and value companies with stable cash flow, all of which help to enhance the resilience of investment portfolios.

Overall, the global market is moving from a situation dominated by a few large technology stocks in the past to a new stage in which profits and industry rotation are more balanced. Although we still need to pay attention to potential risks such as the escalating situation in the Middle East, energy price fluctuations, the trend of de-dollarization, a weakening labor market, and lower-than-expected returns on AI investments, the performance of risky assets is still supportive as the economy maintains moderate growth, corporate profits are solid, and funds remain abundant. As summer fluctuations are gradually digested and market confidence stabilizes, the return of capital and industrial rotation are expected to continue.