Author: Ben Levinson, deputy editor-in-chief of Barrons; Source: Barrons Chinese

The current cycle of US stocks has lasted for a long time, and the factors that drive it forward are weakening. This is a major risk that investors must hedge from now on.

In December last year, I pointed out in a cover article titled "Why the Stock Market Could Gain Another 20% in 2025" that the surprise brought by artificial intelligence, the Fed's further interest rate cuts and the new U.S. relaxation of regulation will drive the stock market to rise sharply again in 2025. While writing this article, I also predict that stock market volatility will definitely rise, but this is probably the only thing I predicted right.

First of all, artificial intelligence does bring surprises to investors, but not the kind of surprise I expected. The huge investments invested by the "Seven Big Seven" in AI have not yet brought profits, and investors have not yet seen the profit margins of non-tech companies increase significantly because artificial intelligence increases productivity. What investors see is DeepSeek launching a model that is cheaper, but equally accurate, than OpenAI and other companies.

Secondly, many people, myself, have thought that if the stock market reacts strongly to Trump tariffs, then the "Trump put" will play a role, that is, if the stock market falls due to tariff issues, Trump will support the stock market through adjustments. Meanwhile, relaxation of regulation will increase productivity and tax cuts will further boost the stock market.

However, Trump showed no tendency to care about the feelings of the stock market, and he was not even worried about the uncertainty his own brings to businesses or ordinary Americans.

Third, when faced with turmoil that could hit economic growth while pushing up inflation, the Fed acts like a deer frightened by dazzling headlights. After January data showed that inflation was overheated, the Federal Reserve announced its resolute resilience at its March meeting. Although financial markets still believe that the probability of interest rate cuts at the June meeting is 57.6%, comments from Fed officials are very "hawkish".

Chicago Fed President Austan Goolsbee said last week that rising inflation expectations would be a "major red flag" for the Fed, which could lead to a rate hike rather than a rate cut. Investors can no longer expect the Fed to cut interest rates simply because the “neutral interest rate” is too high. On the contrary, the Fed can only cut interest rates when an economic recession is imminent.

The stock market also responded accordingly. As of March 30, the S&P 500 fell 7.3% from its all-time high in February, while the Nasdaq Composite, dominated by tech stocks, fell 12%.

Wall Street strategists hurriedly lowered their S&P 500 target price. Last DecemberWhen the cover article was published, they gave a forecast of 6,500 points for the S&P 500 at the end of this year, and then lowered it to 6,430 points. Barclays, which recently lowered its target price, currently expects the S&P 500 to close at 5,900 points this year.

Retail investors are also extremely pessimistic. A survey by the American Association of Individual Investors (AAII) showed that the proportion of shorts exceeded 50% for five consecutive weeks, which was the longest lasting since the proportion of shorts exceeded 50% for five consecutive days as of October 20, 2022 (close to the bottom of the bear market that year).

Usually, investor sentiment reaches such a pessimistic level, which means that the selling has gone too far and too fast, and the time for buying has come. As DataTrek co-founder Nicholas Colas said in a recent report: "'Panish sell-off' is easy to happen, and 'buy in panic' is difficult to do." UBS strategist Maxwell Grinacoff believes that stocks are volatile faster than fundamental changes, suggesting that stocks may rebound soon.

But I can't double my already radical predictions, although I would love to do so. Many things have changed, and these changes indicate that the pillars of the outperforming U.S. stock market has begun to be eroded. It may not be an exaggeration to say that "sell at highs, not at lows."

The problem begins with Trump’s tariffs. Trump's second term is much larger than his first term, and the 25% tariff on all imported cars in the United States is just the beginning. In addition, the implementation of tariffs has been chaotic. Trump has adopted a "two steps back and further" approach, which makes companies and investors still confused about what will happen when the so-called "liberation day" of the United States arrives on April 2.

Trump's 25% tariff on foreign-made cars could have a counterproductive impact on the United States. The picture shows an electric car waiting for export.

At the same time, many people’s expected relaxation of regulation has not yet happened. Some believe that the end of the investigation into Bitcoin companies such as Coinbase Global is a positive signal, but Michael Darda, chief market strategist at Roth Capital Partners, said: "Relaxation of regulation of cryptocurrencies will not offset the impact of the Smut-Holly Tariff Act 2.0." The Smut-Holly Tariff Act refers to the tariffs introduced by the United States in 1930, which should have exacerbated the economic depression of that era.

Tariffs have severely hit consumer confidence, and the Consumer Confidence Index compiled by the World Federation of Large Enterprises has been in full swing for the fourth consecutive monthIf the price drops, consumers may reduce or stop spending. Business concerns are also growing, with signs of limiting business travel, slowing hiring and implementing other spending controls. Delta, United and American Airlines lowered their respective outlooks earlier in March, as demand for business travel and low-income passengers was weak, and shares fell after companies such as FedEx, Walmart and Nike gave lower performance guidance.

Wall Street has been slow to adapt to this reality. Wall Street analysts still expect the S&P 500 stocks to earn $268.77 per share this year, which is lower than $272.15 at the end of last year, but is still more than 10% higher than $243.72 in 2024.

According to the recent 5720 points, the S&P 500 stocks' earnings per share may be closer to $259, but Lawrence McDonald, head of Bear Traps Report, believes that $259 is still too high, and he believes that the figure is close to $230. The difference between these forecast numbers is not important. At $270, the S&P 500 has an expected P/E ratio of 20.64 times; at $259, it has a 22 times; at $230, it has a 24.8 times. "From the rate of change and how the CFOs behave, the current earnings expectations for S&P 500 stocks are still too high."

In such an environment, investors need to see one or two "superheroes" appear, but the "superheroes" they can think of are currently in a state of "missing in missions."

First is the Federal Reserve. The U.S. economy is slowing — something the Fed acknowledged at its March interest rate meeting — but inflation expectations are rising, reflecting the additional yields in the five-year inflation-protected bond (TIPS) are currently close to their highest level this year. Inflation is the nemesis of the Federal Reserve. As "uncertainty" becomes the most discussed issue at the moment, the Federal Reserve has been bound to a certain extent, and this situation has not happened for a long time.

Then there are the "Big Seven". I admit that artificial intelligence is very important as a transformative technology, but spending in this area has reached a staggering level. There is a possibility that the Big Seven, as a whole, continues to behave like the oil company when fracking technology first appeared. Energy companies have invested billions of dollars in this new technology, only to find that the resulting crude oil oversupply has not brought profits, causing their stocks to continue to underperform the S&P 500 for 10 years.

Bear Traps's McDonald believes that this is exactly the current situation of the "Big Seven" who have invested a total of trillions of dollars in new technologies, from "cash bulls" to "prodigal sons." Analysts have been hoping that these investments will pay off soon, but heThey may have to start lowering their expectations. "The AI ​​revolution will become a bit like a shale revolution, and the understanding of this risk has just begun."

When the "Big Seven" accounts for a very high index weight, the above risks are particularly significant. When everything goes well in the Big Seven, shorting a highly concentrated market can be fatal, but once the situation starts to change, insisting on holding their stocks can also be fatal.

DeepSeek appears at a critical period for the Big Seven, and investors are beginning to think about whether they overinvest in artificial intelligence. If the answer is "yes", then the stock market is in big trouble.

From now on, investors should start thinking about increasing their holdings in sectors they have long avoided—oil and raw materials—using them as a tool to hedge against changes that are happening in real terms.

There is no feast that lasts forever, especially in the market with a long cycle. The risk now is that this cycle has been going on for a long time and the factors that are driving it forward are starting to weaken.

Maybe we should believe whatever Trump says: He wants to reshape the U.S. economy and says he is willing to bear the pain necessary to achieve this.

We should invest according to what he wants to do.