Outlook for the US stock market in the third quarter of 2025 from CITIC Securities: The fundamentals still have resilience, short-term disturbances do not change the upward trend.

CITIC SEC expects the performance of the US stock market in the third quarter of 2025 to continue to show a growth trend, with the information technology sector leading profit growth once again. Despite the divergence in profit performance between technology and non-technology sectors, most industries are still maintaining high profit growth. Overall, earnings expectations for the US stock market have been structurally revised upwards for the year, with technology giants remaining the core driver. The current market has doubts about the sustainability of cyclic investment in technology companies and has raised concerns about the bubble in the US AI field. However, due to the difficulty of disproving its sustainability in the short term and the fact that the technology industry has not widely used debt for capital expenditure, it is expected that the extreme scenario of the AI bubble bursting in the short term will be difficult to occur; instead, cyclic investment is expected to continue to drive the narrative of AI. Furthermore, the market is monitoring the spread of risks in US private credit, but currently, it remains an isolated risk event. Although US large banks have relatively large risk exposures, they have a strong capacity to absorb isolated risks. Therefore, CITIC SEC believes that as long as private credit does not evolve into systemic risk, its impact on the overall US stock market can be controlled. Overall, despite concerns about the sustainability of technology investments and credit risks, it is expected that the upward trend of the US stock market will be difficult to change in the short term with strong earnings support. In the third quarter of 2025, the performance of the US stock market continued to grow, with significant differences between technology giants and non-technology sectors. In the third quarter of 2025, the US stock market maintained its growth resilience, but internal differentiation patterns were evident. According to LSEG data as of the end of October 2025, the S&P 500 Q3 consensus revenue/profit year-on-year growth rates were 5.9%/5.5%, with a quarterly growth rate of 1.7%/-0.2%; the Nasdaq 100 saw revenue/profit growth rates rise to 12.9%/16.7% and a quarterly growth rate of 4.9%/3.2%. Breaking it down, the MAG8 (MAG7 and Broadcom Inc. (AVGO.US)) as growth engines saw a high year-on-year revenue/profit growth rate of 17.4%/29.6% in Q3, with a quarterly growth rate of 7.9%/16.8%; whereas the S&P 492 excluding the MAG8 showed weak performance, with revenue/profit year-on-year growth rates of only 4.4%/2.0% and a quarterly profit growth rate dropping to -1.9%, indicating a clear lack of growth momentum in non-technology giants. At the industry level, the information technology sector led with revenue growth of 14.1% and profit growth of 17.6%, while performance expectations for the consumer, financial, and other industries saw significant upward revisions compared to September, with downward revisions in energy and healthcare. From 2025 to 2026, the growth of the US stock market's performance is expected to accelerate, with clear growth trends in industries. As of October 27, 2025, the full-year revenue/profit growth rate expectations for the S&P 500 have been revised upwards by 1.0/1.5 percentage points to 5.2%/6.6% from the low point in June, with the Nasdaq 100 being revised to 10.2%/13.3%, and MAG8 continuing to dominate growth with a revenue/profit growth rate of 13.7%/15.8%; the revisions for 2026 have been more significant, with the earnings growth rate expectations for the S&P 500, Nasdaq 100, MAG8, and S&P 492 being revised upwards by 3.5, 4.6, 6.5, and 2.3 percentage points respectively since the beginning of the year. On the industry side, the leading sectors in terms of growth expectations for 2025 are information technology (revenue +13.2%, profit +18.5%) and finance (profit +7.6%), while lagging sectors are energy (revenue -4.5%, profit -10.5%), and materials; for 2026, the main growth trends switch, with information technology (revenue +16.3%, profit +23.8%) benefiting from the demand for AI computational power, materials (profit +23.5%) relying on energy transformation and supply constraints, healthcare (profit +15.2%) leveraging innovation cycles and AI healthcare applications, and utilities driven by interest rate cuts and electricity demand. The main trend of individual stock upgrades focuses on AI and resources, with the AI core engine of MAG8 showing significance. Individual stock upgrades focus on two categories: AI and the computational power industry chain, where Micron Technology (MU.US) benefits from the rise in storage prices, Broadcom Inc. continues to raise performance expectations thanks to its AI semiconductor business expansion, while industry chain targets such as Amphenol (APH.US) and Synopsys, Inc. (SNPS.US) are also receiving attention; in the resource and niche track, Newmont Mining (NEM.US) (rising gold prices) and the Mosaic Company (MOS.US) (rising fertilizer prices) have seen their expectations rise due to improved sector outlook. Stocks with downward revisions are under multiple pressures: Tesla, Inc. (TSLA.US) due to pressure on gross margins and subsidy reductions, Boeing Company (BA.US) affected by delivery delays, and Occidental Petroleum Corporation (OXY.US) facing downward pressure on oil prices, resulting in significant downward revisions in profit expectations. At the MAG8 level, the resonance between computational power and cloud service demand is strengthening: NVIDIA Corporation (NVDA.US) and Broadcom Inc. have seen an expansion in their 2026 performance expectations; the optimistic CAPEX budgets of the four major tech giants in North America are expected to exceed 70% of their operating cash flow for the same period, but still within an acceptable range; on the end-device side, Apple Inc. (AAPL.US) has guided next quarter's performance above market expectations, while Tesla, Inc. continues to face pressure. It is important to note that risks such as high valuation of AI computing chips and the commercialization of application scenarios still need to be continuously monitored. The potential risks in the US technology industry's cyclic investments and credit markets are not expected to pose short-term threats. Cyclic investments by US technology companies are expected to continue to drive the upturn in AI sentiment. Since September this year, US technology companies have been engaging in investment behaviors that lock in orders and funding commitments around the AI ecosystem. In the medium to long term, cyclic investments among US technology companies help lock in AI ecosystem resources at both ends of supply and demand. As long as the sustainability of cyclic investments in technology companies is not disproven, short-term inter-company cyclic investments are expected to significantly boost industry chain capital expenditures, thereby accelerating the expansion of the AI industry chain. During the current financial reporting season, concerns about the 'AI bubble' in the US stock market have begun to surface, mainly due to Oracle Corporation's use of large-scale borrowing to advance AI-related capital expenditures. Since the end of September, Oracle Corporation's five-year credit default swap (CDS) has been continuously rising, reflecting a divergence in future growth expectations driven by its stock price increase and credit spread widening due to debt repayment concerns. However, if other US AI companies do not widely adopt debt-supported capital expenditure models, it is still unlikely for the extreme scenario of the 'AI bubble' bursting in the short term to materialize. The potential risks in the US private credit market are expected to have a manageable impact on the banking industry. Since September this year, Tricolor and First Brands have filed for bankruptcy, sparking concerns in the market about the US private credit sector. Federal Reserve data shows that as of the second quarter of 2024, the total size of the US private credit market has reached $1.4 trillion, so if systemic risks occur, they could have a significant impact on the financial markets. Although default activities in the private credit market slowed down in the first half of this year, they significantly increased in the second half. However, overall default rates are still at moderate levels, with no signs of rapid deterioration yet. In terms of risk exposure, US large commercial banks have relatively high exposure to non-bank Financial Institutions, Inc. (NBFIs). However, large commercial banks often have a strong capacity to absorb isolated risks, so if the partial risks in the US private credit market do not evolve into systemic risks, CITIC SEC still believes that its impact on Bank of America Corp. is relatively manageable. Risk factors: Repetition of US global tariff policies; Capital outflows due to a US dollar credit crisis; US stock market performance below expectations; Further escalation of conflicts involving GEO Group Inc; Unexpected spread of risks in the US private credit market. Investment advice: The core driver of the current rise in US stocks has returned to the fundamentals of companies, and the easing of US-China relations is expected to significantly reduce the potential disruptions caused by additional risk factors. Since US President Trump unilaterally announced on October 10th his intention to impose an additional 100% tariff on Chinese imports, the US stock market has rebounded from its low point at that time. The continued upward trend of US stocks is mainly due to the continued upward revision of US stock performance expectations since June this year, and during the current earnings season, most technology companies have issued relatively optimistic earnings guidance. Therefore, the core factor driving the upward trend of US stocks has returned to the fundamentals of companies, and the successful meeting of the US and Chinese leaders is expected to further alleviate potential risks arising from GEO Group Inc's political factors. CITIC SEC believes that US stocks still have significant valuation potential, especially in the technology sector with strong fundamental growth. Looking ahead, with the gradual implementation of the OBBB Act, CITIC SEC recommends focusing on the technology industry in the US stock market where valuations are more aligned with performance, as well as manufacturing industries benefiting from the re-industrialization process and policy support, upstream resource sectors, and the nuclear power industry. This article is based on "CITIC SEC Research," by authors: Xu Guanghong, He Linhuan, and Qing Shidian; GMTEight Editor: Li Junling.