We bring a word of caution in a rally everyone loved

Our last article was issued in mid-March, when the US major index was already down more than 10% from Feb high due to the tariff worries between US and China, Canada and Mexico. We have been adding positions as we suggested in our last article, and our strategy performed really well.

It’s hard to believe it only took 3 trading days since Trump’s liberation day on Apr 2^nd, for the market to reach the bottom and rebounded sharply to form new all time highs. It’s largely because of retail investors participation, and we all need to understand the US equity market is never the same again since the pandemic. According to CNBC, before 2020, individual investors’ money account for somewhere between 10-12% in the US equity market, and it has increased to 20%-30% in 2024. The retail investors have been buying the dip relentlessly in this long running bull market, and it has paid off.

 Source: CNBC, 17th May,2025

During the first 3 days after liberation day, the institution investors have been selling hard, and they would normally wait for the geopolitical uncertainty to settle, or for price bars to test the lows a couple of times before getting back in. So between 7^th Apr and first week of May, a lot of the analyst was expecting the market to re-test the lows, but it never happened, the retail investors are pushing the market higher and left many institution investors to play catch up, and they were forced to change their position to bullish in June, and become very bullish in the last week of June when the previous all time high was taken out. So what does it mean for market going forward.

We think the market has room to run, but we are reducing our exposure to US equities as the market goes up.

The bullish arguments for US equity are actually quite strong

1.      While most institutions are waiting for a pull back to jump into the market, the market never had any large dip in the last two months, which means there are still money sitting on the sidelines, and if there is a pull back, those money is likely to take the opportunity to buy.

2.      Since the Russia and Ukraine war broke out, investors are tired of geopolitical event driving the market, whether it’s the war in the Middle East, or the trade wars between US and the rest of the world, the economic data has always been good, investors realized the US economy is more resilient and diverse than anytime in recent history.

3.      The fear of AI infrastructure digestion phase is fading, at least for now!! After a fanatic investment phase in AI training in the last 2 years, now the hyperscalers like Microsoft, Google, Amazon etc. are all announcing big investment in AI inferencing, and people realized how much bigger the computer power need is for inferencing than training, and we think the demand for the AI hardware will still be strong for at least another 12 months.

4.      All the major indices just made record highs, and technically, this is a very bullish signal to go even higher

However, we are more cautious than the rest of the market. We think the market is again too complacent for three main reasons,

1.      Even if the economic indicator says the US still has a very strong economy and labor market, we think the data will show some worry signs going into the end of 2025, because it takes time for the tariff impact to reflect in economic numbers. 

2.      People say the Q2 earning and Q3 guidance expectation is very modest, but we don’t think that’s right. Back in early Apr, the expectation for Q2 guidance is low, but with multiples expanded aggressively in the last 2 months, valuation is again stretched, and if the Q3 guidance is week, we don’t think the market will react well.

3.      If we look closely to what has performed best during this rebound, clearly AI related semiconductors are leading the way, but also, the retail favorite crypto, quantum computing and space technology related stocks are showing incredible momentum with many stocks double or tripled since the Apr low. Many of these stocks are speculative and we don’t like the fact that such a large volume of retail money gambling in the market like casinos.

4.      In a world where the market can go up and down by a twit from the President, we always look at is the next group of news good news or bad news. With the Trump tax cut passed the congress, market has priced in US and China trade war to not escalate, we think the next group of news which can surprise market to the upside is very limited.

In the last 2 month, we have been over weighting international equity, specifically Chinese equity (Hong Kong and Chinese ADRs in the US), and under weight US equity. Our view still stands today from valuation and sentiment point of view. We think Chinese equity has more room to run.

We recently sold all of our long positions in MP Materials（NYSE: MP）, Unity Software（NYSE:U） and Nvidia(NASDAQ: NVDA), partly sold our positions in Roku（NASDAQ: ROKU）, and also opened a short position in Tesla（NASDAQ: TSLA）. We added Alibaba（NYSE: BABA）, GaoTu（NYSE: GOTU）, and Snap(NYSE: SNAP). In the coming weeks, we are looking to sell part of our positions in AMD（NASDAQ: AMD） at USD160, and look to add to Rivian（NASDAQ: RIVN） at around USD11.4, Micron at around USD105.