Guosen: Weakening of the value storage function of US bonds, US stock investment rating downgraded to "weaker than the market"

Guosen released a research report stating that as the US fiscal deficit continues to worsen, the function of US Treasury bonds as a store of value is being replaced by gold. The investment recommendations are as follows: the target range for the 20-year US Treasury bond yield in 2025 is 4.9%-5.2%, with a suggestion to avoid it; the target price for gold is $3500 per ounce, and if the market value equals that of US Treasury bonds, the price of gold will reach $4400 per ounce, with a recommendation to increase holdings. At the same time, the target price of the S&P 500 in the second half of 2025 is: 5600 points (optimistic) - 5200 points (benchmark) - 4300 points (pessimistic). The investment rating for US stocks has been downgraded from "neutral" to "weaker than the overall market". Guosen's main points are as follows: US Treasury bonds lose their function as a store of value, and gold will replace them After the collapse of the Bretton Woods system, the reserve currency system of the US dollar was jointly constructed by the US dollar and US Treasury bonds. The US dollar serves as a medium of exchange while US Treasury bonds serve as a store of value. With the US deficit out of control, the latter has lost its original function and is being replaced by gold. The valuation of US Treasury bonds has decoupled from gold, US stocks, and other assets. This means, on a pricing level: 1) US Treasury bonds will transition from a premium asset to a discount asset. The historical yield of US Treasury bonds has been lower than a reasonable valuation (expected inflation + expected economic growth rate); in the future, the reasonable valuation may be the lower limit of the yield. 2) The trend in the total market value of gold and US Treasury bonds has been long-term consistent, but gold has been lower than Treasury bonds in the long run. In the future, as gold replaces US Treasury bonds, the total market value of gold should surpass that of US Treasury bonds. 3) The stock-bond risk premium no longer constrains stock valuations. Target price: The bank believes the floor of the 20-year US Treasury bond yield will be 4.35%, with a target yield of 4.9%-5.2% in 2025, and recommends avoiding it. At the same time, the target price for gold is $3500 per ounce; if the market value of gold equals that of US Treasury bonds, the price of gold will reach $4400 per ounce, with a recommendation to hold. The long bull market in US stocks is driven by money, and the logic is not easily broken The long bull market in US stocks is a monetary phenomenon: 1) From a fund flow perspective, the long-term current account deficit in the US will inevitably need a capital account surplus to close the loop, so US stocks always have foreign buyers. The same case can be seen in India and the Indian stock market. 2) From a supply perspective, US companies entered a long-term net repurchase state in the 1980s, reducing the number of stocks, which has led to an increase in stock prices. 3) From a fundamental perspective, fiscal expansion means more government orders, higher inflation, and higher profit margins, so US stocks lead the way. Therefore, long-term fiscal and trade deficits are actually beneficial to US stocks: if the deficit reduction for the Department of Generalized and Expanded Employment Act is not as expected, and the trade war ends, it will strengthen the logic of the long bull market in US stocks. However, the short-term economic outlook faces risks Under the impact of the tariff war, the rise in commodity prices do not necessarily an increase in residents' income like service prices do. The bank expects that for every 10 percentage point increase in tariffs, residents' real purchasing power will decrease by 0.5-0.7 percentage points. On the other hand, US consumer credit has seen negative growth year-on-year for two consecutive quarters, a phenomenon that historically corresponds to actual economic downturns. In response to the "economic shrinkage" and "actual economic downturn," the bank used its inherent income model to calculate the target price of the S&P 500 in the second half of 2025: 5600 points (optimistic) - 5200 points (benchmark) - 4300 points (pessimistic). The investment rating for US stocks has been downgraded from "neutral" to "weaker than the overall market". Intermediate option for hedging and bottom fishing The bank looks for clues from two angles: 1) Alpha and Beta; 2) The rotation rules between historical economic cycles and stock market bull and bear markets. The bank suggests considering the following during the upcoming hedging phase: 1) Quality factors that can attack and defend at the same time; 2) Dow Jones, dividend factors, utilities, and daily consumption as pure defensive options; 3) The Nasdaq 100 can be used to hedge against risk with a little alpha, while preventing missing the boat, but is not enough to counter an actual economic downturn. For future bottom venturing, the bank suggests: prioritizing Philadelphia semiconductors; followed by Nasdaq 100, NASDAQ Composite, Russell 2000, small and mid-cap growth, and the information technology sector. Risk warning: Uncertainty in US diplomatic and trade policies; Uncertainty in US fiscal policies; Uncertainty in the global political, economic, and trade landscape; Possibility of historical rules not replaying in the future.