Since the dawn of the new century, the U.Sstock market has witnessed a remarkable bull run, particularly in the tech sector, characterized by a phenomenon known as the "Davis Double Play" effect—where both profit growth and valuation expansion play a significant role in sustaining market momentumIn stark contrast, China's A-share market often tends to follow trends without much regard for actual performance, leading to a flurry of "violent rebounds" that are more akin to showmanship than sustainable growthRecently, as the global wave of artificial intelligence (AI) gains momentum, A-share speculative stocks have seen an impressive rally, soaring 47% this year—outpacing the Shanghai Composite Index by a staggering 42 percentage pointsInterestingly, this rise only reflects a modest decline of 4.76% compared to the historical peak reached in 2020. Looking ahead, there is potential for further highs by the end of the year.

The explosive rise of generative AI is significantly altering profit expectations within the U.S

tech stocks.

As of last Friday, the S&P 500 index has rebounded by a whopping 27.4% from its lowest point last October, leaving it only slightly shy of the highs seen in January 2022—a mere 9.07% lowerThis upward trajectory suggests that the bull market is very much alive, leaving bearish sentiments strewn across Wall StreetMichael Hartnett, a prominent analyst from Bank of America who gained recognition last year for his accurate predictions, acknowledged his oversight regarding market trendsHe cited three main reasons for this miscalculation: the economy has remained resilient without slipping into recession, there has been no tightening of credit, and, most importantly, the surge in the AI sector has reshaped investment landscapes.

According to data from StockQ, nominal GDP growth in the U.S

from 2020 to 2022 witnessed fluctuating figures of -2.24%, 10.07%, and 10.22%, reflecting a shift from a deflationary bull market to inflationary conditions, subsequently leading to a bearish phaseIn March of last year, the Federal Reserve commenced a rigorous interest rate hike cycle, eventually raising rates by 500 basis pointsWith the pause on further hikes in June, the U.Sstock market has regained its bull momentumThe economy's nominal growth in the first quarter reached an impressive 7.7%, prompting market speculation about an upcoming rebound in corporate profitsOne cannot help but question whether this reflects a debt-driven delusion or the genuine magic of technological innovation.

The unparalleled interest rate hikes by the Federal Reserve over the past 40 years have not mirrored the dramatic economic downturns experienced in the 1960s and 70s

Back then, soaring dollar values along with the resultant deindustrialization hampered corporate earnings, unlike the present scenario where robust profits from tech giants define market trajectories.

Over the past decade ending in 2022, tech behemoths including Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla recorded average annual profit growth of 14%. Despite a setback of 20% in profits over the previous year, the advent of generative AI has reignited optimistic profit forecasts, with expectations of an average annual growth of at least 15% over the next two yearsCitigroup's analytical models reveal a significant decrease in the impact of macroeconomic factors on the stock market—from 83% at the beginning of March to 71% currently—the most substantial three-month drop since 2009. This clearly indicates that tech stocks have successfully extricated the market from the clutches of the Federal Reserve's tightening cycle.

The sustained bull market of U.S

alefox

stocks is heavily underpinned by robust earnings.

As of today, the MSCI AC World Index shows an average annual growth rate of merely 6.46% over the past decade, with U.Sperformance single-handedly contributing to much of this riseIn stark contrast, the Shanghai Composite has managed to grow by an average of only 5.55% annually, illustrating its underperformance.

What accounts for the recurrent highs in the U.Sstock market? The explanation lies in the significantly higher growth rate of corporate profits compared to the overall economic growthBetween 1988 and 2019, the U.Sexperienced average nominal GDP growth rates of 4.6% and real growth rates of 2.5%, while the annualized return of the S&P 500 total return index hovered around 10.7%. The contributions to this growth were derived predominantly from earnings per share growth (7.2%), dividends, share buybacks (2.5%), and valuation increases (1%). During the previous three and a half years, however, the contribution from valuations toward the stock market's upward trajectory has been merely marginal

CNN reports that the S&P 500's price-to-earnings ratio has only risen from 24.21 at the end of 2019 to 25.53 currently—a modest increase of 5.45% despite the index climbing 36.5% during the intervening period.

By the early hours of Wednesday, the nine largest publicly traded companies on U.Sexchanges were Apple, Microsoft, Google, Amazon, Nvidia, Tesla, Berkshire Hathaway, Meta, and TSMC, with respective annual gains approximating 43%, 41%, 39%, 49.5%, 194%, 115%, 10%, 133.6%, and 41%. Notably, the insurance giant Berkshire underperformed compared to its peers, with its 915 million shares of Apple amounting to roughly 23% of the company's total market capFamous for avoiding tech stocks, Warren Buffett now considers Apple a consumer stock—a strategic move that surprisingly keeps him soundly at ease.

In contrast to the continuous bull run of U.S

tech giants, the hype surrounding popular sectors of the A-share market often fizzles out within three years, resulting in a pattern where bulls are short-lived and bears dominateData from Wind indicates that between 2000 and 2022, the most frequently leading sectors—food and beverage and coal—appeared eight and seven times, respectively, among the annual top three performance sectorsOnly food and beverage managed to stay for three consecutive years at the top and impressively remained dominant from 2016 to 2020, realizing a staggering 2.45-fold increase while the Shanghai Composite declined by 1.87% in the same timeframeYet, good things rarely last, and the food and beverage and coal sectors have both recorded declines of 9.96% and 0.84% this year alone.

The AI sector may soon hit new heights again.

The dominance of U.S

tech giants is less about the mere hype surrounding generative AI and more about Wall Street's uncanny ability to spin compelling narratives around bull marketsThis results in a dichotomy where winners thrive while a larger portion of the market declines; the "rising tide lifts all boats" mentality manifests starkly hereSuch bullish forecasts can become self-fulfilling prophecies, but they necessitate solid performance backing and the influx of massive capitalWith a median price-to-earnings ratio of 16 for the S&P 500, the top nine companies boast a rolling median P/E ratio of 34, with a simple average P/E ratio soaring to about 97. Does this signal an emerging blue-chip bubble? Analysis shows that excluding the 50 largest constituents from the S&P 500, its P/E ratio rests at 15—below the historical average of 18.

Meanwhile, A-share blue chips face significant valuation disparities, with median and average dynamic P/E ratios of 8.98 and 14.2 respectively, also recording an average annual rise of 16.2% this year

The two most prominent concepts trending in the market—H-share related and the ChiNext valuation—exhibit remarkable similarities, with respective annual growth at 8.78% and P/E ratio about 8.21, frequently appealing to risk-averse investors due to their consistent yet modest gainsIn contrast, the consistently booming AI sector has achieved a remarkable 47% rise, but with a considerably high P/E ratio of 81. Investors face a critical decision: should one anticipate a rotation in investment styles to benefit blue-chip stocks or take a risk on the high-flying AI sector hoping for greater returns?

From an investment perspective, the speculative nature of A-share popularity leans toward aggressive trading, often disregarding fundamentalsThe total market capitalization of U.SAI stocks stands at $13 trillion, with a rolling P/E ratio of 37—indicating a segment characterized by high valuations, substantial increases, and high institutional allocation