Wall Street Giants: The Most Intense Selling in U.S. Stocks May Have Passed, But "Bottom Fishing" Still Carries Risks

After a month of intense fluctuations, the U.S. stock market finds itself at a critical crossroads. On one hand, data from institutions like JPMorgan Chase indicates that the long-term deleveraging process in the tech sector is nearing its end, with leveraged ETFs, hedge fund net exposures, and CTA positions having significantly declined from extreme levels. On the other hand, concerns about inflation have resurfaced, the path of interest rates remains uncertain, and doubts regarding the returns on AI capital expenditures are still not resolved. Macroeconomic risks are taking over from position cleanup, becoming the core driver of market pricing. As August begins, major Wall Street banks such as JPMorgan, Goldman Sachs, and France's Industrial Bank are intensively releasing strategy reports that outline a complex picture of "deleveraging nearing completion, valuations becoming reasonable again, but macro risks still accumulating." Deleveraging is nearing its end: the most severe sell-off in tech stocks is likely behind us In the past two months, global tech stocks have experienced a "perfect storm" driven by leveraged liquidation. JPMorgan's strategist Nikolaos Panigirtzoglou's team pointed out in a recent report that the most intense phase of deleveraging in the tech sector is likely over. Data shows that the scale of leveraged ETFs has decreased from a peak of $50 billion to $17 billion; hedge fund net exposure in the tech sector has dropped from 5.0 standard deviations to 1.7; and CTA positions have returned to the 39th percentile. In the South Korean market, the liquidation of leveraged ETFs has essentially been completed, and hedge funds have finished about 90% of their deleveraging process, with overall leverage levels falling back to a more reasonable range. JPMorgan believes that investors' deleveraging in tech and semiconductor sectors (including storage stocks) has progressed faster than previously expected, leaving limited room for further deleveraging. Goldman's data also supports this conclusion. The global tech equity exposure has undergone the largest sell-off in over five years, with the asset management scale of South Korean stock leveraged ETFs falling from $53 billion at the June peak to $15 billion. The leveraged exposure of fundamental long-short clients to momentum factors has dropped to the 28th percentile of the past year. "The crowded trade has shifted from 'everyone is on board' to a significant portion of people already having exited, and some even being forced to exit." Hedge fund position monitoring data provides three clear signals: the combined z-score of hedge fund positions and factor performance across the entire market has fallen to an historically low extreme; North American hedge funds have reduced their positions by a magnitude corresponding to three standard deviations over five days, indicating that sustained large-scale selling behavior is nearing its end. The storage sector is facing a re-pricing opportunitycurrent stock prices imply only one year of a high prosperity cycle, and if the uptrend extends to mid-2027, valuations will fall below historical averages. However, the end of deleveraging does not mean that the market will sail smoothly. Goldmans top trading team warned that, although the deleveraging process is nearing completion, risks have not been fully cleared, and multiple key events will continue to suppress the market. Goldmans latest "Funds Flow" report indicates that substantial risk reduction has yet to be completed, and constrained by seasonal fund outflows and insufficient institutional risk appetite, U.S. stock upward momentum in August lacks the "fuel" needed. Valuation reset and earnings support: the S&P 500 has its strongest earnings season in five years With the progress of deleveraging, global stock valuations have experienced a significant reset. The U.S. stock valuation premium relative to the rest of the world has shrunk to about 22%, the lowest level in over six years and well below the 10-year average of 31%. RBC Capital Markets strategist Lori Calvasina pointed out that the valuations of the Nasdaq 100 Index, the S&P 500 Index, and even the tech sector are beginning to appear "reasonable" again. At the same time, the recently concluded Q2 earnings season has delivered one of the "strongest on record" performances. According to FactSet data, S&P 500 component companies are expected to achieve a year-over-year earnings growth of 47.4% for the quarterthe strongest earnings growth in the past five years. Goldmans statistics show that among the companies that have reported earnings, 64% exceeded Wall Street's expectations by at least one standard deviation. AI infrastructure-related stocks contributed about one-third of the EPS growth for the S&P 500 in Q2. Goldman estimates that if we exclude the extraordinarily large investment returns from a few tech giants, the overall year-on-year growth rate of the S&P 500's earnings would be about 26%; including those returns, the overall growth rate skyrockets to 45%. The profits of the components in the European Stoxx 600 index surged 19% year-on-year after nearly two years of stagnation. Macroeconomic risks are accumulating: inflation and interest ratesthe "sword of Damocles" However, the earnings glow of the earnings season has not dispelled the clouds on the macroeconomic horizon. Goldman derivatives expert Lee Coppersmith warned that as the earnings season closes, market attention will shift back to interest rates, inflation, and economic growth. Volatility in U.S. Treasuries has begun to accelerate again, and real yields remain close to cycle highs. Inflationary pressures remain stubborn. France's Industrial Bank strategist Alain Bokobza's team notes that the second round of tariffs in the U.S., accelerated capital spending cycles in AI and infrastructure, increased oil price volatility, and persistent large fiscal deficits in developed economies indicate that market expectations for inflation are "far too low." France's Industrial Bank forecasts that core PCE will remain above 3% this year and recommends allocating TIPS, copper, and gold as inflation hedges. The U.S. Treasury market is pricing in these concerns. The yield on the 10-year U.S. Treasury has climbed to around 4.74%, while the 30-year yield has broken past 5.27%, the highest level in nearly 19 years. JPMorgan has raised its forecast for the 10-year U.S. Treasury yield to 4.85% and its target for the 30-year yield to 5.40%. The steepening of the yield curve is historically very raremarkets are casting doubt on whether the Federal Reserve can maintain its 2% inflation target. The path of the Federal Reserve's interest rates is full of uncertainty. At the July 29 FOMC meeting, the decision to keep rates unchanged was passed 9 to 3, with three hawkish members voting against, advocating for a 25 basis point increase. Market expectations for a rate hike in September to October have become significantly high, totaling about 90%. Meanwhile, Goldmans Vice Chairman and former Dallas Fed President Robert Kaplan has explicitly warned that if inflation data does not cool down, the Fed may restart rate hikes as early as this fall, likely not as a one-off but as a series of 2 to 3 tightening actions. Shift in investment strategy: from "momentum chasing" to "value dispersion" Against the backdrop of nearing completion of deleveraging, a valuation reset, but still accumulating macro risks, Wall Street strategists are outlining a new investment blueprint. JPMorgan emphasizes that the storage sector is ushering in a re-pricing opportunity, and positioning is no longer the main concern; fundamentals and valuations will determine direction. From market-cap-weighted to equal-weighted. The equal-weighted S&P 500 index actually rose by 1.3% in July, while the market-cap-weighted S&P 500 fell by 0.1% during the same period. Goldman points out that the equal-weighted S&P, low-volatility S&P, and S&P 500 excluding AI all reached historical highs in the last week of July. This indicates that the market's rising trend is shifting from being led by a "few large leaders" to broader industry participation. France's Industrial Bank recommends going long on the equal-weighted S&P 500 index, going long on U.S. inflation-protected bonds, while shorting 10-year U.S. Treasuries. Strategists note that the second round of tariffs in the U.S., accelerated capital spending cycles in AI and infrastructure, increased oil price volatility, and sustained high fiscal deficits in developed economies all suggest that market expectations for inflation are currently far too low. Societe Generale strategist Manish Kabra states that currently, nine sectors have achieved double-digit profit growth, with small-cap industrial EPS rising by 30%. He is optimistic about bank stocks and expects a rebound in the second half of 2026; at the same time, he recommends stocks related to industrials, utilities, and materials, as well as the "return to U.S. manufacturing" theme. RBC Capital Markets maintains its year-end target for the S&P 500 at 8,150, believing that stronger economic growth and corporate profits can push the market further up by 11.4%. However, strategist Calvasina warns that during the early stages of changes in Federal Reserve leadership, the S&P 500 typically experiences significant volatility; "stock market movements will not be smooth." Goldman retains its year-end target for the S&P 500 at 8,000, implying about 8% upside potential. But Goldman's traders warn that as macroeconomic uncertainties persist, the likelihood of "high-correlation events" is rising. Traders are hedging against systematic volatility across the broader marketthe so-called "reverse dispersion trade" has been identified by Goldman as one of the best strategies to cope with the current market. Coppersmith notes that as the earnings season concludes, market attention will return to interest rates, inflation, and economic growth. "Volatility in U.S. Treasuries has begun to accelerate again, and real yields remain close to cycle highs, and based on historical experience, in this kind of environment, stock volatility typically does not maintain structural narrowing." Tony Pasquariello, head of Goldmans hedge fund business, points out that in the past month, "a heavy hammer has smashed through consensus positions," and the most crowded, most straightforward, and easiest trades to leverage have been forced to cool down, but the risks have not disappeared.