On October 13, 2022, the S&P 500 index hit a phased bottom of 3491 points, and since then it began a bull market that lasted more than two years. On February 19, 2024, it hit a record high of 6147 points, and has since lowered; the other two major U.S. stock indexes (Nasdaq and Dow Jones) performed similarly. Considering that the US stock market has already cut its highest point by 10% (Nasdaq needs a little more), the entire market is focusing on one question: Is this the end of a big bull market in the past two years and four months? Or is it another "fake fall", just like what happened in July-October 2023, April 2024 and July 2024?

History proves that predicting the top is like predicting the bottom, it is thankless. I have several friends with rich experience in investing in the US stock market. They all believed that "everything is in place" between April and July 2024 and sold all their positions, including Nvidia and Apple. In one or three months, I'm afraid no one can "accurately" predict the market, even the most advanced quantitative funds can't do it. However, we can at least discuss some longer-term and more fundamental issues, such as the following two questions:

There is a company with a growth rate of about 5% of operating income and a growth rate of about 10%, but its static price-to-earnings ratio is as high as 34 times. So are you willing to buy it?

There is another company with a growth rate of about 12% of operating income and a growth rate of 15-18%, but its static price-to-earnings ratio is as high as 31 times. So are you willing to buy it?

There is another company with a growth rate of operating income of about 15% and a growth rate of net profit of 30-35%, but its static price-to-earnings ratio is as high as 45 times. So are you willing to buy it?

The above three companies are: Apple, Microsoft, and Netflix. The first two companies are the largest and third largest companies in the US stock market value, and the third is also an important large-scale technology company and the leader in the entertainment industry. Their P/E/G are obviously all far higher than 1.0 times; using DCF models for them requires very tolerant conditions (such as high perpetual growth rates and low capital costs) to draw underestimated conclusions. This is after 28 months of bull market, U.S. stock technologyA microcosm of the current situation of the giants.

Please note that when discussing the valuation of US stocks, we are often easily led by the computing power industry chain and fall into a vicious circle such as "Is it a cyclical or growth company to reach the bottom" and "how to value Broadcom". The problem is that the computing power industry chain is only a small part of the US stock market, although it has produced three trillion-dollar companies (Nvidia, TSMC, and Broadcom). Since the valuation of the computing power industry chain is recognized as "metaphysics", it might as well put it aside and take a look at other sectors. At least in the Internet industry I am concerned about, all high-quality companies are not cheap. From a horizontal perspective, some companies are a little cheaper, such as Google and Meta, but we can't say they are "very cheap".

Looking back on the past two years, it is not difficult to find that the bull market in the US stock market is actually supported by two factors that are not completely related to each other: AI and the economy.

Genetic AI has greatly pushed up the computing power industry chain, and at the same time pushed up almost all major Internet manufacturers. For some companies, such as Nvidia, TSMC and Microsoft, it brings tangible revenue and profit boosts; on a larger scale, it brings confidence.

The US economy is much stronger than expected, and the recession that investors expect has not arrived. From July to October 2023, the market experienced a long, uneasy adjustment, and then the consensus expectation turned out to be no recession in 2024. The consumption and employment data in the United States are both very strong, and inflation has been controlled to a certain extent.

Starting the second half of 2024, a third layer of factor has been superimposed, namely the expectation of the Fed's interest rate cut - this will also be the first "normal" interest rate cut cycle since 2001 that has not been disturbed by major external events. In this way, the capital market ushered in an extremely rare positive factor of the "Trinity": the overall macroeconomic is strong, the new technological revolution is booming, and the Federal Reserve is still cutting interest rates! You can hardly imagine a better situation than this!

Even the frequent international geopolitical tensions in the past two or three years are sending ammunition to the US stock market: to a certain extent, US stocks, like gold, play the role of geopolitical "avoidance"The role of "Fenggang". If you are nervous about the international situation but are not particularly nervous, you may transfer your position from emerging markets and other developed markets to US stocks. So we have repeatedly seen that there are turbulences in any corner of the world, no matter who wins or loses, the beneficiaries are US stocks. At a high level, it seems unfair, but it is actually logical.

The current situation is very different from three months ago. First of all, the pace of the Fed's interest rate cut is likely to be interrupted , even returned to the track of interest rate hikes, because inflation is back. Most American consumers list inflation as their most worrying economic problem, and the trade frictions raised everywhere in the United States will only intensify rather than ease inflation. In the first half of 2023, U.S. stocks reversed under the pressure of the Federal Reserve's interest rate hikes, but the market valuation level at that time was only more than half of what it is now. If the expected rate cut becomes a rate hike, it will obviously be particularly unfavorable for technology giants with historical valuations.

Secondly, when the international geographic tension reaches a certain point and breaks through a certain critical point, the US stock market, like other risky assets, is not immune. Just like in the initial stage of a large flu, people with relatively healthy bodies may be able to survive alone and stand out from others; but as the flu continues to evolve, even the healthiest people will get sick, only the severity of the disease. After all, US stock market is not gold or US debt, and will inevitably be affected by geopolitical risks. Are we at that critical point now? Not sure, but it is certain that it is getting closer to the critical point. Once again, the AI ​​arms race may have progressed to the point where investors feel unprofitable in the short term. In 2025, the total capital expenditure (Capex) plan of the US technology giant exceeded US$300 billion, of which Amazon is US$100 billion, Google is US$75 billion, and Meta is US$60-65 billion - the biggest driving force behind it is undoubtedly AI computing power procurement. The rising capital expenditure not only brings heavy pressure on depreciation costs, but more importantly It is the squeeze of free cash flow. You should know that an important driving force of the US stock bull market is the continuous dividend repurchase of listed companies. The dividend repurchase amount of technology giants in a single quarter can often reach the magnitude of 10 billion US dollars; spending more 10 billion in computing power means returning tens of billions to shareholders less. Moreover, 2025 is by no means the peak of computing power construction, and even more crazy days are still to come. This is of course good news for the computing power industry chain, but the same thing: the computing power industry chain is only a small part of the US stock market. As for whether the US economy will enter the recession track, it has become a less important issue.. The economic cycle exists objectively, and there is no economy in the world that only expands and does not recession. The developed economies like the United States are especially unavoidable. There was no recession in 2023, nor in 2024, and there was probably no recession in the first half of 2025. However, assuming that the Fed returns to the interest rate hike track and the White House refuses to implement fiscal expansion under the banner of "saving", it means a double tightening of fiscal and currency. How strong is the fundamentals of the U.S. economy to withstand this double tightening (and international trade and geopolitical pressure) without any harm? I can hardly imagine this possibility. I emphasize again: in any case, it is a thankless behavior to predict the bottom or top of the market. However, common sense tells us that the capital market is like a pendulum, always swaying between extreme optimism and extreme pessimism. The extreme of things will be the opposite of an objective law. Common sense also tells us that no matter how high-quality the asset is, it has a reasonable valuation. If it deviates too far from the valuation center, the pressure of mean regression will inevitably occur. Mean regression may occur one month, three months, or one year later, but it will always occur in the long run. No matter whether or not the mean regression is reached, there is one thing I am sure of: generative AI is a real technological revolution, and its long-term influence may be greater than the Internet itself, reaching a height comparable to electricity and even drilling wood to make fire. What is changing everything in the long run and overestimating it in the short run is not contradictory. Because human society is moving forward in a wave-like manner, if we only know how to simply extrapolate, we will make mistakes that are sometimes overly optimistic and sometimes overly pessimistic. Because I am full of confidence in generative AI, even if I think the valuation of US stocks is seriously expensive, I am still optimistic in the long run - adjusting the valuation of high-quality assets to return to below average is a great thing, and real value investors should welcome this.