What will happen after the best summer, as autumn gradually cools down? At the end of July, it is not advisable to be overly pessimistic and optimistic about the market in August. Looking back at the past three weeks, the market has indeed emerged. Although it is not as strong as April, basically all the optical interconnect, storage, and cloud vendors mentioned before have performed well. The situation has changed recently, and August was the best summer before. The tweet discussed two potential risks: Oil prices and midterm elections, the former has recently stabilized in the range of over 90, while the latter is gradually affecting the market; Another more important variable is the long-term bond yield. A few days ago, here's https://(((((x.com)))/qinbufank/status/2090623459391094800? As discussed in s=46&t=k6rimWs Ebo2D2TXolYcM-A, the higher the 10-year US Treasury yield, the more the market enters a valuation friction zone, making it difficult to have a major market trend. Let's talk about personal opinions: 1. The core contradiction in the current market is strong profitability, but valuation is unusually sensitive to interest rates 1) The relationship between valuation and risk-free interest rate: The P/E ratio of the S&P 500 for the next 12 months is approximately 21.01 times, corresponding to a rough profit return rate of approximately 4.76%; The future P/E ratio of NASDAQ 100 is 24.10 times, corresponding to a profit return rate of approximately 4.15%. It can be intuitively explained that the S&P profit yield is almost equal to the 10-year US Treasury yield, and the Nasdaq profit yield is even lower than the 10-year US Treasury yield. Under this structure, if the 10-year US Treasury yield continues to rise, the impact on valuation may be greater than the same magnitude of profit correction. 2) On the other hand, the fundamentals are indeed very strong. The adjusted profit of the S&P 500 in the second quarter is expected to increase by 31.1% year-on-year, with a profit growth of about 72% in the technology sector. Among the 436 companies that have already announced their performance, 85.1% exceeded expectations. Overall, the profit growth is strong enough, but the valuation buffer has been depleted by the yield of long-term bonds. 2. Recently, from a macro perspective, there are several points: 1) Regarding the Strait of Hormuz and oil prices Previously, here was https://(((((x.com)))/qinbafrank/status/208953861047639947? S=46&t=k6rimWs Ebo2D2TXolYcM-A talked about the long-term trend of the US Iran game, and next Monday the US will announce stricter economic sanctions, hoping to force Iran to back down through sanctions and blockades; Iran will naturally not surrender, and it is estimated that they will still find an opportunity to push up oil prices and force the EU to back down before the midterm elections. Today, Axios reported that the US warship is organizing oil tankers to pass through the southern channel of the strait tonight, which should be the weakest time for the Iranian navy's reconnaissance, monitoring, and strike capabilities. I feel that Iran will not sit idly by and see its asymmetric advantage greatly weakened. The rise in energy prices caused by the Iran War is affecting the election performance of the ruling party. This will generate an important political feedback: The closer the oil price approaches or exceeds $100, the more motivated the White House is to restore more oil flow through negotiations, selective exemptions, alliance coordination, or other means; But if Iran believes that high oil prices are significantly changing domestic politics in the United States, it may also be more willing to retain this bargaining chip; Therefore, before the election, there is both a risk of further rising oil prices and a strong political "pressure to lower prices". 2) US Treasury yield Previously, here was https://(((((x.com)))/qinbafrank/status/2089715193890976004? S=46&t=k6rimWs Ebo2D2TXolYcM-A has written about why the future will usher in a high yield pivot era; Here is https://(((((x.com)))/qinbafrank/status/2090435324765970902? S=46&t=k6rimWs Ebo2D2TXolYcM-A discusses structural issues in the era of high yield and high pivot; These two https://(((((x.com)))/qinbufark/status/2090655005741404233? S=46&t=k6rimWs Ebo2D2TXolYcM-A, what are the good medicines in the Besen agent kit? What is a temporary solution and what can address the root cause; And here is https://(((((x.com)))/qinbufark/status/2090623459391094800? Let's talk again about s=46&t=k6rimWs Ebo2D2TXolYcM-A. The higher the ten-year US bond yield, the more volatile the market enters the valuation friction zone, making it difficult to have a major market trend. In the medium term, it is believed that Besant can lower the yield of long-term bonds, but in the short term, it still depends on the trend of yields. If the yield continues to rise, it will not come down and the market will be under pressure. 3) Mid term elections We discussed as early as the end of July that if the election situation is not clear and political uncertainty occurs before the midterm elections, some funds may seek refuge first. 3. On the fundamentals of the industry 1) The latest round of financial reports from cloud vendors has given a clear signal: AI demand is not a problem, and commercialization is no longer just an expectation; The current issue has escalated to whether the speed of commercialization can catch up with the speed of capital investment. Looking at the financial reports of Microsoft, Amazon, Google, and Meta, it is evident that AI revenue, orders, and usage are all accelerating, but free cash flow is currently at the lowest stage of capital expenditure first and revenue recognition lagging behind. 2) But what is the next scenario after coding that the market is starting to worry about? Regarding this point today, here is https://(((((x.com)))/qinbafrank/status/2091420164109836623? S=46&t=k6rimWSEbo2D2TXolYcM-A has been discussed in detail: the second growth engine of AI is likely to not manifest as a neat "second coding", but as hundreds of business processes simultaneously shifting from manual operation to AI execution. The next driving force lies in whether these dispersed scenarios can converge into sufficient revenue, cash flow, and productivity before the first stick slows down significantly. This is currently the most critical time difference in the AI application layer. I personally tend to lean between the baseline scenario and quick succession, but the market may still doubt and worry before seeing new evidence, which is also a source of market volatility. 3) AI debt problem: risks are real, but not yet a comprehensive credit crisis The credit spread of technology companies has widened to about 89 basis points, which is 9 basis points wider than the overall investment grade bond market; Amazon's recent spread of $25 billion in long-term bonds is about 120 basis points above treasury bond, significantly higher than in the past. This indicates that the market is beginning to demand higher financing compensation But overall, the short-term default probability of big technology is very low, and the risk of new cloud vendor NeoCloud may be slightly higher. However, according to the latest financial report, the business performance growth of CRWV and NBIS, the two major new cloud factories, is still outstanding. AI debt risk typically propagates in this order: Long end returns and credit spreads widen ->AI stock valuations decline ->Neocloud and project financing costs rise ->Small project delays or cancellations ->Upstream order growth rates truly begin to decline ->Finally, credit events may occur. At present, it is only in the stage of suppressing valuation and increasing financing costs, and there is no sign of project cancellation or weakened demand for orders. 4) From this perspective, it is estimated that the market will need more evidence from future financial reports to prove several points: AI revenue can continue to exceed capital expenditures; The revenue from non coding commercialization and true standardization is the second growth engine; AI project ROIC can exceed the new capital cost; The backlog of orders can be converted into revenue and cash beyond expectations. All of these prove that market confidence is stronger. See the remaining part below