How to Confirm the Bottom After a Sharp US Stock Market Pullback?

As the situation in the Middle East continues to be tense, shipping in the Strait of Hormuz has not improved, and Brent crude oil has once again risen above $110 per barrel. The global financial markets are also showing typical macro-driven trends: stocks, bonds, and gold are all falling simultaneously, and safe-haven assets are temporarily ineffective. Panic sentiment is continuing to spread, with the VIX fear index approaching 30. The U.S. stock market has experienced a significant pullback, with the S&P 500 declining for four consecutive weeks, down more than 5% since the U.S.-Iran conflict began, once dipping below the 200-day moving average and reaching a six-month low.

Energy shocks disrupt the monetary policy framework through the inflation channel, prompting global central banks to accelerate their hawkish stance. As concerns over stagflation intensify, market expectations regarding the Federal Reserve’s monetary policy path have changed dramatically, shifting from 1-2 rate cuts within the year to delaying rate cuts or even repricing rate hikes. The OIS market indicates a rate hike of about 10 basis points by the Federal Reserve in October.

At the same time, the inherent fragility of the U.S. stock market began to expose itself: the AI sector’s valuation experienced a pullback, the correlation between the seven tech giants and the broader market started to decouple, and the default rate on private credit rose, compounded by the previously crowded trading structure, leading to a magnified fall in the market under external shocks.

From Goldilocks to Stagflation Trading, the Market Enters a Balanced Bear Market Phase

After the outbreak of conflicts in the Middle East, the market shifted from the early expectation of “the conflict can end in the short term” to a long-term outlook, with the logic changing from the early year’s golden girl to concerns about stagnation and inflation risks. Within this framework, the logic of asset pricing has fundamentally changed: interest rates no longer provide support, but instead become the core variable that suppresses equity market valuations. At this stage, global interest rate and inflation concerns still dominate the stock market trends. The Federal Reserve’s lack of hope for interest rate cuts within the year, and even the pricing of interest rate hikes, has fundamentally shaken the core logic that previously supported the bull market in U.S. stocks.

The most critical factor is the speed of changes in bond yields. A real yield increase of 2 standard deviations (an increase of 40 basis points or a real yield close to 2.2%) or a nominal yield decrease of 2 standard deviations (a decrease of 50 basis points or a nominal yield close to 3.86%) are both detrimental to the stock market. In both scenarios, the S&P 500 averages a decline of about 4% within one month.