As the new earnings season started with a bang, the three major U.S. stock indices rose collectively last Friday, with the Dow Jones Industrial Average (DJIA) and the S&P 500 reaching new historical highs. The DJIA increased by 0.97%, the S&P 500 rose by 0.61%, marking the 45th time this year it has set a new record, and the Nasdaq Composite gained 0.33%, still nearly 2% away from its previous peak.

Looking at the weekly performance, the DJIA accumulated a 1.21% increase, the S&P 500 rose by 1.11%, and the Nasdaq Composite climbed by 1.13%, with all three indices recording gains for five consecutive weeks.

However, investors must remain vigilant about market volatility risks. Zhang Xinmao, a senior market analyst at Guotai Junan Research Institute, analyzed for 21st Century Economic Report journalists that historically, U.S. stocks tend to rise during the entire cycle of the Federal Reserve's preemptive rate cuts. But during the initial phase of rate cuts when expectations are unstable, indices may continue to fluctuate.

Before the beginning of November, rate cut trades, recession pricing, and election trades will continue to intertwine. Affected by the release of U.S. economic data and the progress of the election, Zhang Xinmao expects market volatility to remain high and will suppress the space for risk preference to recover upward within the phase. U.S. technology stocks, benefiting from rate cuts, are expected to rebound; the performance of U.S. cyclical and value stocks is worth looking forward to, such as the S&P 500 with better valuation cost-effectiveness, which has relatively higher certainty under any circumstances.

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Soft landing expectations and the rate cut cycle support the market.

Behind the recent continuous rise of U.S. stocks, the expectations of a soft landing for the U.S. economy and the Federal Reserve's rate cut cycle are the key reasons.

Data from the U.S. Department of Labor shows that the U.S. CPI year-on-year growth rate in September fell from 2.5% in August to 2.4%, a decline for six consecutive months, the lowest level since March 2021, with a month-on-month increase of 0.2%, slightly higher than expected; the core CPI in September grew by 3.3% year-on-year, a new high since June, with a month-on-month increase of 0.3%, also slightly exceeding expectations.

At the same time, the number of unemployment benefit applications has risen significantly. As of the week ending October 5th, the initial claims for unemployment benefits rose to 258,000 people, a level not seen since August 2023, significantly higher than the previous week's 225,000 and the market expectation of 230,000. In addition, as of the week ending September 28th, the number of continued claims for unemployment benefits rose to 1.861 million people, higher than the market expectation of 1.83 million and the previous week's 1.819 million, indicating that the risks in the labor market are increasing.Lu Zhe, Chief Economist of Founder Securities and Deputy Director of the Research Institute, analyzed to the 21st Century Economic Report reporter that, on the one hand, the overall inflation in September exceeded expectations but continued the downward trend, and the inflation risk has been greatly alleviated. During the period of declining inflation, the market's concern about inflation that exceeds expectations is relatively limited. On the other hand, the Fed's attention to the dual risks of inflation and employment has clearly shifted towards the downward risk of employment. Therefore, employment data such as non-farm and initial jobless claims have a greater impact on the market. Of course, the initial jobless claims data at the beginning of this week were greatly affected by factors such as hurricanes and strikes, and there is a certain amount of noise.

The focus of the Fed's monetary policy has temporarily shifted from fighting inflation to stabilizing employment. Yang Chang, Chief Analyst of the Policy Team at the Research Institute of Zhongtai Securities, told the 21st Century Economic Report reporter that under the current background of preemptive interest rate cuts, the Fed's attention to labor market data has increased. Coupled with the tendency of the market to overestimate the level of US employment during hurricanes, after the release of the initial jobless claims data, the market's expectation for the Fed to further cut interest rates in November has increased. However, the pace of interest rate cuts is likely to slow down from 50 basis points to 25 basis points.

Overall, during the Fed's easing cycle, the US stock market often performs well. Since 1971, during the Fed's interest rate cuts, the average annualized return of the S&P 500 index has been 15%. When the interest rate cutting cycle comes during non-recession periods, the returns of US stocks are even stronger, with the average annualized return of large-cap stocks being 25%, and 11% during economic recessions; the average annualized return of small-cap stocks is 20% during non-recession periods, and 17% during economic recessions.

Can the earnings season continue to drive the market?

Looking ahead to the next week, investors will face a series of important data and events, including China's release of third-quarter GDP, total retail sales of consumer goods in September, industrial added value above designated size in September, and trade data in September. The US will release September retail sales data, OPEC and IEA will release monthly oil market reports, and IEA's "World Energy Outlook 2024" will also be released. The eurozone, the UK, and Japan will release September CPI, and the European Central Bank, the Central Bank of Turkey, the Bank of Thailand, the Central Bank of the Philippines, and the Central Bank of Indonesia will announce interest rate decisions. The Nobel Prize in Economics will also be announced.

For US stocks, the earnings season is an important factor affecting the market in the near term. Last week, JPMorgan Chase reported unexpectedly strong net interest income. Specifically, JPMorgan Chase's third-quarter revenue was $43.32 billion, higher than the market estimate of $41.63 billion; net profit was $12.9 billion, better than the expected $11.6 billion; net interest income was $23.5 billion, also higher than the market expectation of $22.73 billion, mainly due to the growth of securities investment and credit card loan business. Wells Fargo's net interest income decreased, but it disclosed that the decline in the fourth quarter would be less than expected.

Driven by good performance, JPMorgan Chase rose 4.44% last Friday, and Wells Fargo rose 5.61%, driving the KBW bank stock index to rise 3.97%, reaching a new high in two and a half years. After the initial success of JPMorgan Chase and Wells Fargo, more giants will disclose their earnings this week, including Goldman Sachs, Bank of America, Citigroup, Morgan Stanley, Johnson & Johnson, ASML, TSMC, Procter & Gamble, and Netflix.

The corporate earnings situation needs to be closely monitored. Wall Street currently expects the earnings of S&P 500 component companies to grow by 4.7% year-on-year in the third quarter, far lower than the 7.9% in the previous quarter, and the lowest growth rate in four quarters. However, from another perspective, due to Wall Street's lower expectations for US stock earnings, this also gives corporate earnings more room to exceed expectations.The surging demand for AI chips may drive the market forward. Zhang Chi, Chief Analyst at Fangde Securities, told reporters from 21st Century Economic Report that recently the US stock market's chip sector has already stopped falling, and Nvidia's latest chip models are still in high demand.

Wall Street generally expects that the strong demand for the new Blackwell chips will lead to strong performance for Nvidia next year. Nvidia CEO Huang Renxun previously stated that the market demand for Blackwell chips is "very crazy."

Given the still strong demand for chips, Nvidia's stock price is expected to reach a new historical high in the coming period. In the past three months, Wall Street analysts have given 39 buy ratings, 3 hold ratings, and 0 sell ratings. After Nvidia's stock price soared by about 200% in the past year, the average target price given by analysts is $152.44, which means there is still room for Nvidia's stock price to rise. As of the close of the US stock market on October 11, Nvidia's stock price was $134.80.

Morgan Stanley analyst Joseph Moore said that we are still in the early stage of the long-term investment cycle in artificial intelligence, Nvidia is the preferred choice in the semiconductor field, still at the forefront of artificial intelligence innovation, and has the opportunity to gain new market share. The production of Nvidia's next-generation GPU chip Blackwell is "on schedule," and the supply for about the next 12 months has already been sold out, which means that customers who place orders now will not receive the goods until the end of 2025. Therefore, Morgan Stanley reiterated its "buy" rating for Nvidia's stock and a target price of $150.