Behind the Wall Street Bull Market

Last week, after suffering three consecutive days of selling pressure, the US stock market finally witnessed a strong rebound. Driven by expectations of a relaxation in the situation in the Middle East, international oil prices dropped by more than 5%, US bond yields plunged from their multi-year highs, and the positive impact of Nvidia's better-than-expected financial results, the Dow Jones Index broke through 50,500 points, setting a new historical high. The S&P 500 Index achieved an eight-day consecutive rise, and the Nasdaq Index also rose simultaneously. However, the hawkish signals released in the latest Fed meeting minutes and the market's concerns over the "overshooting" of expectations for Nvidia's performance, among other factors, pose multiple negative impacts such as valuation bubbles, global financial imbalances, and rising vulnerabilities in the financial system. These also lay the groundwork for future financial market trends, posing a significant threat to global financial stability.

Firstly, current data shows that the rolling price-to-earnings ratio of the S&P 500 Index is approximately 24 times, and the Shiller price-to-earnings ratio exceeds 37 times, far exceeding the long-term historical average of 16 times, second only to the period of the internet bubble in 2000. This "high valuation + high expectations" distorted structure relies entirely on the continuous and exceeding-expected earnings of technology giants. Once the performance fails to meet expectations, the valuation compression will trigger a chain reaction of sharp declines. More dangerously, the market's rise shows extreme divergence, with almost all the gains of the S&P 500 Index coming from the "seven giants of technology" such as Apple and Microsoft, while the combined contribution of the remaining 495 constituent stocks is negative. When the index reaches a new high, nearly two-thirds of the stocks are down, and market breadth continues to deteriorate. This "top-heavy and bottom-light" pattern makes the US stock market a "one-man show" by a few giants. Once the growth of the leading companies weakens, the market will lose support, and the risk of a bubble burst will sharply increase.

Secondly, the continuous strengthening of the US stock market triggers an intensified "hemorrhage effect" of the US dollar, leading to an imbalance in global capital flows. Emerging market financial risks have erupted in a concentrated manner. The excessive concentration of funds in the AI technology sector of the US stock market has strongly diverted from Chinese and Hong Kong stocks. The Nasdaq China Golden Dragon Index has continued to deviate from the trend of the US stock market. Chinese and new energy-related Chinese stocks have been under pressure, and this has further dragged down the A-share related weight sectors, forming an abnormal linkage of "US stocks rising, A-shares weak". At the same time, the fixed interest rate environment and the imbalance in the financial structure have intensified the fragility of the global financial system, laying the groundwork for systemic risks. The US financial sector has fallen by approximately 6% this year, commercial real estate valuations are under pressure, corporate bad debt risks are accumulating, and banks' provision pressure has increased. Credit risk continues to spread. More seriously, technology giants rely on debt financing to expand AI capital expenditures, forming a vicious cycle of "debt expansion - valuation increase - refinancing". Once earnings fall short of expectations, it will trigger an expansion of credit spreads, a sharp drop in asset prices, and a rapid spread of risks to the global financial markets.

Finally, the bubble-like rise of the US stock market will distort economic resource allocation and exacerbate global economic divergence and inflationary pressure. Globally, the US-led technology monopoly is accelerating the reconfiguration of the industrial chain. The United States, with its technological barriers and financial advantages, is squeezing the space for industrial upgrading in emerging markets. World Bank data shows that the growth rate of emerging markets has dropped to 4%, and the gap with developed economies has continued to widen. At the same time, high interest rates and the strengthening of the US dollar have pushed up the pricing costs of global commodities, transmitting input inflation pressure to emerging markets, further eroding residents' purchasing power and suppressing economic recovery momentum.

In summary, beneath the seemingly continuous rise of the three major US stock indices lies a multitude of hazards such as valuation bubbles, imbalances in capital flows, and increasing financial fragility. This kind of rise that is divorced from fundamentals is unsustainable. Once the bubble bursts, the resulting global financial turmoil will cause severe impacts on various capital markets, exchange rate stability, and economic growth. The global financial market needs to be vigilant against the risk of a US stock market correction at a high level, prevent cross-border capital flow shocks, strengthen financial risk prevention and control, and avoid being dragged into crisis by the US stock market bubble.