On August 8th, Schroders global investment released a statement stating that recently, the Japanese stock market has been the first to bear the brunt of selling pressure, but the policy adjustment by the Bank of Japan is not entirely bad news for the local stock market. With the reversal of the Japanese yen and wage growth, it is expected that this will be favorable for future consumption. Based on these economic trends, the bank is optimistic about the overall profitability of Japanese companies. In recent days, there has been a sharp volatility in global stock markets, with major indices around the world experiencing significant declines. In the three days leading up to August 5, 2024, the MSCI All Country World Index (ACWI) dropped by 6.4%. As of August 6, there were signs of a recovery in financial markets, with the Japanese stock market rebounding. Simon Webber, Portfolio Manager of the Schroders global investment team, stated that in the past few days, there has been intense selling in the stock market, affecting market predictions and leading to crowded trades. However, looking at the strong performance of global stock markets from October 2023 to the middle of July 2024 (the MSCI All Country World Index has risen by about 32% from its low in October 2023), this adjustment is considered completely healthy and normal. Several factors have contributed to the decline in global stock markets. These include weak US economic data, sparking concerns of an economic recession, and expectations of rapid interest rate cuts by central banks. Furthermore, the unexpected interest rate hike by the Bank of Japan, as well as concerns about the earnings outlook for companies, have also affected the market. Despite some signs of inflation slowing down in the US, the Federal Reserve kept interest rates at their highest level in 23 years during its meeting on July 30-31, 2024. Subsequently, weak US employment data in early August further confirmed the Fed's decision. The number of non-farm payroll jobs added in July fell to 114,000, well below the market's earlier expectations of 175,000, while the unemployment rate rose to 4.3%. George Brown, Senior US Economist at Schroders global investment, stated that the increase in the unemployment rate has triggered the Sam Rule, when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to the low of the past 12 months. This rule has historically been a reliable indicator of an economic recession, but there have also been instances of misjudgment. Investors are concerned whether the Federal Reserve has missed the best time to cut interest rates, and whether maintaining a wait-and-see attitude could lead to an economic recession. The issue lies in the fact that the Fed hinted in June 2024 that it would only cut interest rates once this year. This hawkish stance prevented it from quickly changing policy direction in July. The Fed may need to cut rates by 50 basis points in September to make up for it. However, the current market expectations for the Fed to cut interest rates five times in 2024 are an overreaction. From multiple perspectives, recent weak US employment market data shows that higher interest rates are working as expected; if rates are in a tightening state, the labor market tends to weaken. Additionally, the primary reason for the increase in the unemployment rate is the new labor force provided by southern border immigrants. Schroders global investment believes that one should not overinterpret the employment data of a single month, and it is necessary to wait for several months to judge whether there is a clear trend. The solid second-quarter economic growth data in the US, with a GDP growth rate of 2.8%, indicates that recent weak economic data is not enough to trigger the large-scale selling behavior seen recently. On July 31, 2024, the Bank of Japan raised interest rates from the previous range of 0% to 0.1% to 0.25%. Taku Arai, Deputy Head of the Schroders global investment team in Japan, explained that the interest rate hike by the Bank of Japan reflects its confidence in the macroeconomic growth of Japan, including wage growth. This also reduces the risk of further weakening the yen, avoiding a potential rise in Japanese inflation. When the interest rate hike by the Bank of Japan coincided with weak US economic data (indicating the need for the Fed to cut interest rates), the yen appreciated significantly, but it also triggered further financial market volatility. Simon Webber pointed out that yen carry trades (where investors borrow yen and invest in higher-yielding overseas assets) are being rapidly unwound, leading to significant volatility and rapid appreciation of the yen. The yen has long been severely undervalued, but it is still too early to determine whether the financial markets are overreacting or whether all positions have already been unwound. The significant volatility of the yen has caused turmoil in financial markets, but as always, any change in trends has winners and losers. Taku Arai believes that these financial market trends will support a positive outlook for Japanese small-cap stocks, as they are more focused on the local domestic market, and the financial industry is also a beneficiary. However, Japanese exporters may be negatively impacted. This selling wave coincides with the second quarter corporate earnings season of 2024, but it has not caused much concern. Simon Webber pointed out that the second-quarter corporate earnings performance in major global stock markets has been quite strong, despite noticeable signs of consumer weakness. The recent trends in financial markets largely reflect investors' concerns about the outlook for the US economy, leading to a drop in the valuations of US stocks from the high levels we have been warning about for some time. In fact, with about 75% of the earnings season of the S&P 500 completed, the number of companies reporting earnings that exceed expectations significantly exceeds those that fell below expectations. Tina Fong, Strategy Manager at Schroders global investment, stated that the earnings growth rate in this earnings season is 14%, higher than market expectations. However, the magnitude of the beats is lower than in previous quarters, which has disappointed the market. Earnings per share growth rate - forecasted EPS for the second quarter of 2024 is expected to outperform the first quarter.Investment in the field of artificial intelligence. Tina Fong added that for investors, whether these technology companies can successfully translate their investments in artificial intelligence into profits will be a major focus in the coming quarters.Overall, Schroders global investment points out that while there is indeed downside risk in the stock market, the fundamentals of companies are strong, and the increased volatility in financial markets presents an opportunity for us to take advantage of mispriced adjustments in investment portfolios. The possibility of an economic soft landing remains the bank's main forecast scenario, and it still expects moderate growth in corporate profits to continue to support the stock market in the medium term.