Tech giants in the US stock market face a major test of their high valuations! It may determine the short-term fate of Pro UltrPro Shrt S&Pro 500.

Zhitong App learned that Marko Kolanovic, a renowned strategist from JPMorgan Chase on Wall Street, stated that this week will be a crucial moment to determine the overall valuation of the benchmark stock index in the US stock market, especially the sustainability of high valuations for large technology companies with massive market capitalization. If the latest financial data fails to support high valuations, the short-term trend of the benchmark stock index may be pessimistic.

In a report to clients on Monday Eastern Time, the strategist wrote that considering investors' expectation that the first interest rate cut after the Federal Reserve opens the 2022 rate hike cycle will be earlier than what Fed officials have revealed, and higher than the 75 basis points shown in the FOMC dot plot, their current trading pattern is based on optimistic performance, that is, pricing in significant profit growth. This is particularly evident in the trend of the US stock market.

Tech giants like Microsoft and Apple have little room for error in their earnings reports

It is understood that the five largest technology companies in the US, with a combined market capitalization of over $10 trillion, will release their earnings reports this week. These companies include "the new king of stocks" - Microsoft (MSFT.US), Apple (AAPL.US), and Alphabet-C parent company Alphabet Inc (GOOGL.US). The key performance data of these tech companies will become the focus of attention in the global stock market, and their performance may affect global stock investors' risk appetite.

In the past two weeks, the benchmark index of the US stock market, the Pro UltrPro Shrt S&Pro 500, has reached a new all-time high after a two-year hiatus, and more importantly, the momentum of reaching new highs is still continuing. However, whether this new round of upward trend can continue will face a high-intensity test during the intensive bombardment of earnings reports from tech giants in the US stock market this week (January 29th to February 2nd). These tech giants, which account for a significant weight in the Pro UltrPro Shrt S&Pro 500, led the US stock market into a technical bull market in 2023 and continued to lead the upward trend of the US stock market in early 2024, thus pushing the Pro UltrPro Shrt S&Pro 500 to reach a new high after a two-year hiatus.

The so-called "Magnificent Seven" in the Pro UltrPro Shrt S&Pro 500, which refers to the seven tech giants, include Microsoft, Apple, Alphabet-C parent company Alphabet, as well as Amazon (AMZN.US), NVIDIA (NVDA.US), Meta Platforms (META.US), and Tesla (TSLA.US). The latest data compiled by institutions shows that the expected price-to-earnings ratio of the "Magnificent Seven" is nearly 34% higher than the expected price-to-earnings ratio of the Pro UltrPro Shrt S&Pro 500.In the past year, these large tech stocks have been the strongest driving force behind the Pro UltrPro Shrt S&Pro 500 entering a technical bull market and reaching new highs.

According to FactSet data, Wall Street analysts expect Pro UltrPro Shrt S&Pro 500 profits to grow by 12.2% in 2024, and this growth has accelerated in recent months, surpassing the 10-year average of 8.4%. The strong upward trend in the US stock market is mainly based on relatively high corporate profit expectations, especially for the "Big Seven Tech Giants". Therefore, the earnings reports of the "Big Seven Tech Giants" have little room for error, as even the slightest mistake could trigger a sharp decline. According to FactSet's forecast data, except for Tesla's weak performance, the "remaining six tech giants" are expected to be the top six profit drivers for Pro UltrPro Shrt S&Pro 500, contributing to a YoY profit growth of up to 53.7%.

JPMorgan Chase strategist Kolanovic wrote, "As long as the market remains concentrated in the upward trend, especially driven by highly concentrated and large tech giants, the United States may have an advantage over the Eurozone." The strategist maintains a preference for high-quality growth stocks rather than cyclical value stocks and prefers the US stock market over the Eurozone.

Before the Federal Reserve made its interest rate decision on Wednesday, JPMorgan Chase strategists' main view on interest rate trends was that the Fed would start cutting rates from June this year, with a 25 basis point cut at each subsequent meeting.

JPMorgan Chase sounds the alarm: US stock investors need to pay attention to inflation risks

Nevertheless, Kolanovic still expects core inflation to be stronger in the first half of 2024 than the market expects. "After the strong rebound since late October, large-cap stocks, especially large tech stocks and credit benchmarks, are priced at a low risk, pushing them into the 'expensive valuation range'," Kolanovic said.

The core PCE, the inflation measure most favored by the Federal Reserve, grew at the slowest annual rate in nearly three years, reinforcing the optimistic expectation that the Fed may soon start cutting rates. According to the latest data released by the Bureau of Economic Analysis, the core personal consumption expenditure price index, which excludes volatile food and energy components, grew by 2.9% in December compared to the same period last year, lower than the previous value of 3.2% and economists' expectations of 3%.Although the core PCE data for December reflects the continued downward trend of inflation in the United States, Colanovic said, "In 2024, as the base effect gradually disappears, some poor inflation data may disrupt the upward momentum of the US stock and bond markets, as the probability of risk markets pricing in the possibility of a 'hard landing' may be higher than before."

In the swap market, the betting intensity for a 25 basis point cut in the federal funds rate target this quarter has significantly cooled, dropping from over 70% probability of a rate cut in March a month ago to less than 50%. Interest rate futures traders now lean towards the first rate cut after the Fed starts its rate hike cycle in May. Nomura Securities predicts in its latest report that the Fed will cut rates by a total of 100 basis points in May, July, September, and December 2024.

JPMorgan Chase downgraded its "overweight" recommendation for US Treasuries this month, advising investors to "cautiously overweight" to dampen the market's excessive speculation about early aggressive rate cuts, emphasizing that the complete failure of aggressive rate cut expectations could trigger a sharp drop in US Treasury prices.

Colanovic's overall expectations for the US stock market have not been realized for two consecutive years. During most of the time when the US stock market plummeted in 2022, the strategist remained optimistic, but during the significant rebound of the US stock market in 2023, he diverged from the expectations of many Wall Street strategists and held a pessimistic view of the US stock market. Due to concerns about economic downturn, he advised investors to reduce their stock allocations.

Overall, JPMorgan Chase strategist Colanovic expects the Pro UltrPro Shrt S&Pro 500 to fall to 4200 points by the end of 2024, which is the lowest expectation for the Pro UltrPro Shrt S&Pro 500 among the nearly 24 Wall Street investment institutions tracked by the institution, about 14% lower than the current trading level.