The current US economy is at a critical juncture where multiple policy variables are intertwined: debt interest payments have broken through historical peaks, the Federal Reserve's monetary policy path is shrouded in mystery, and corporate profits are trying to find a balance between trade frictions and technological innovation. The game of these three dimensions not only affects the trend of core assets such as US stocks, US bonds, and the US dollar, but also reflects the deep contradictions between fiscal expansion, political intervention, and market rules in the US economy.

1. High debt and political game: a “stress test” of fiscal sustainability

The debt problem of the U.S. federal government has entered the critical point of "quantitative change to qualitative change". At present, debt interest expenditures have exceeded federal health insurance and defense expenditures. According to the forecast of the "Committee for a Responsible Federal Budget", interest expenditures will reach 1 trillion US dollars next year, second only to social security as the largest expenditure. The core of this change lies in the "inversion" of debt costs and economic growth. Since the early 2000s, the inflation-adjusted 10-year U.S. Treasury yield has long been lower than economic growth expectations, and now both have risen to more than 2%, forming what Bernstein (former Biden economic adviser) calls a "game changer for debt sustainability."

Behind the debt expansion is the continued expansion of policies. The Trump administration's tax cuts and spending bills and the Biden administration's expansionary fiscal plan have jointly pushed up the deficit. Goldman Sachs bluntly stated that "the current path is completely unsustainable": the debt-to-GDP ratio is about to exceed the post-World War II peak, and the primary deficit is still far higher than the historical average during the economic boom. What's more difficult is that Trump's trade war and tariff policies have exacerbated this dilemma - high tariffs may suppress economic growth, push up inflation and interest rates, and further increase debt repayment costs, forming a vicious cycle of "tariffs-inflation-interest rates-debt".

In the face of the crisis, the policy level has fallen into politicization. Bernstein called on Congress to set up an "emergency" fiscal response mechanism, but avoided the impact of Biden's government spending and focused on Trump's policies; Trump tried to ease debt pressure by pressuring the Federal Reserve to cut interest rates. This idea of "covering fiscal imbalances with monetary easing" laid the groundwork for subsequent market fluctuations.

2. Monetary policy fog: the "expectation tug-of-war" between the Federal Reserve and the market

The Fed's policy path is becoming a core variable in market fluctuations. At the beginning of the year, traders were almost certain that interest rate cuts would resume in September, but strong July employment data and uncertainty about tariff policies have reduced this probability from "a sure thing" to about 70%. The June CPI data has therefore become the "decisive factor" - Barclays pointed out that the June CPI has deviated from expectations by the largest margin in history. If it shows that price pressures are heating up (especially driven by Trump's tariffs), it may completely shake expectations of interest rate cuts and push up US bond yields; if the data is mild, it may restart easing bets.

Political interference has further exacerbated policy uncertainty. Trump has publicly criticized Fed Chairman Powell many times, even suggesting that he should "resign". Deutsche Bank warned that this risk is seriously underestimated: if Powell is forcibly removed, the trade-weighted US dollar index may plummet by 3%-4% within 24 hours, and the US bond market will see a 30-40 basis point sell-off. ING Group pointed out that this may lead to a steepening of the US bond yield curve - short-term interest rates will fall due to easing expectations, and long-term interest rates will rise due to inflation concerns, reflecting the market's pricing of "impaired policy credibility".

There are also differences within the Fed: Powell emphasized the "moderately restrictive" interest rate stance, and the dot plot showed that there might be two rate cuts before the end of the year, but seven officials believed that there would be no rate cuts in 2025, and Waller and other directors hinted that rate cuts would be restarted as early as this month. This disagreement, combined with political pressure, has caused the U.S. Treasury market to fluctuate within a range - the two-year yield has fluctuated between 3.7% and 4%, and volatility has dropped to a three-year low. Traders continue the short-term strategy of "buy on dips and sell on rallies."

3. Corporate Profits and the Stock Market Paradox: Differentiation and Opportunities under Low Expectations

Compared with the cautiousness of the bond market, U.S. stocks hit a record high after the sell-off in April, but it is doubtful whether the "report card" of the second quarter earnings season can match the optimistic sentiment. According to Bloomberg Intelligence data, the second quarter earnings of S&P 500 components are expected to grow by only 2.5%, the weakest performance since mid-2023. Six of the 11 sectors are expected to see a decline in profits, and the full-year growth forecast has dropped from 9.4% in early April to 7.1%.

This "low expectation" has become a potential positive. Charles Schwab pointed out that the current expectation threshold is extremely low, and it is easier for companies to exceed expectations. The key lies in whether gross profit margin can withstand tariff pressure. The performance of technology giants is particularly critical: the "seven major technology giants" are expected to grow profits by 14% in the second quarter. If they are excluded, the S&P 500 profit may fall slightly by 0.1%. Despite the uncertain trade environment, Microsoft, Meta and others still plan to increase capital expenditures to US$337 billion in fiscal 2026. AI investment has become a core growth point. BlackRock believes that "AI is the most enduring dominant theme."

Market differentiation and external variables have exacerbated the complexity. The expected correlation of S&P 500 components in the next month is only 0.12 (only 3.2% of the time in the past 10 years is below this level), showing that the performance of individual stocks is highly differentiated, and the importance of stock selection is highlighted. At the same time, the weakening of the US dollar (down 10% this year, the worst performance in the first half of the year since 1973) has become an "underestimated tailwind" for export companies, especially for large-cap stocks with a high proportion of overseas revenue; while European companies have continued to lower their earnings expectations due to tariff concerns and the strengthening of the euro (13% appreciation this year), and sectors such as automobiles and mining have been most affected.

Conclusion: Reconstructing market logic in the policy vortex

The US financial market is experiencing "policy-driven" fluctuations: the steep upward channel of the ratio of debt interest to GDP has made interest rates the core node connecting fiscal and monetary risks. If the Federal Reserve succumbs to political pressure and cuts interest rates prematurely, it may push up long-term inflation and interest rates, exacerbating the debt burden; if it insists on fighting inflation, it will directly amplify the pressure of interest expenditures. This "double helix trap" is intertwined with the differentiation of corporate profits and the weakening of the US dollar, causing the market pricing logic to shift from "economic fundamentals driven" to "policy game driven." This game across fiscal, monetary and corporate levels is reshaping the confidence boundary of global capital in US dollar assets.