Mastering the core logic of the US stock market trend: From beginner to expert

The changes in the US stock market trend may seem complex on the surface, but in fact, they follow a set of learnable patterns. Many investors are familiar with the concepts of “bull markets” and “bear markets,” yet they lack a deep understanding of the driving forces behind market fluctuations. In reality, in the long term, the direction of the US stock market is determined by companies’ earning capabilities; short-term volatility is more influenced by market liquidity. As the world’s largest stock exchange hub, the New York Stock Exchange and NASDAQ’s ups and downs serve as a barometer for global capital flows. This article will break down the analytical logic behind US stock market trends in an accessible way.

Why should we pay attention to the US stock market trend?

Over the past decade, the US stock market has been the standout performer among major global markets. According to public market data, the NASDAQ Composite Index has a cumulative return of 361.68%, the S&P 500 228.89%, and the Dow Jones Industrial Average 169.89%, far surpassing the Nikkei 225 (158.46%), FTSE 100 (57.76%), and Hang Seng Index (19.17%).

This sustained upward momentum stems from the US financial market, as the largest, most active, and most influential financial ecosystem globally, attracting top-tier companies from various industries to list and raise funds here. Whether in consumer, technology, healthcare, or energy sectors, investors can find leading global enterprises in the US stock market, making it an essential market for global asset allocation.

Basic analysis framework of US stock market trends

Dual drivers: corporate earnings and market confidence

The fundamental force driving US stock market trends is the profitability of listed companies. For example, during 2018-2019, US tax reform policies led to a reduction in corporate tax burdens, resulting in an overall profit growth of over 25% for S&P 500 constituents, laying the foundation for that bull market.

However, earnings are not the sole determinant. During the COVID-19 pandemic in 2020-2021, many companies faced operational challenges, yet market confidence strengthened due to the Federal Reserve’s ultra-loose policies, near-zero interest rates, and large-scale government economic stimulus. At this time, the P/E ratio of the S&P 500 expanded from 18x to over 24x, and this “valuation expansion” was enough to sustain market gains, illustrating that market sentiment and liquidity can sometimes dominate short-term trends more than fundamentals.

The decisive impact of Federal Reserve policies on liquidity

History shows that the Federal Reserve’s monetary policy often has a greater short-term influence on US stock market performance than economic fundamentals. During the prolonged bull market from 2009 to 2015, the Fed’s three rounds of quantitative easing injected over $3.5 trillion into the market. Even with moderate economic growth, the stock market achieved remarkable gains. In early 2020, during the pandemic shock, the Fed expanded its balance sheet by $3 trillion within two months, driving a V-shaped reversal in the stock market.

Conversely, when the Fed tightens policy, pressure becomes evident. In Q4 2018, the Fed continued raising interest rates and shrinking its balance sheet, leading to a 15% decline in the S&P 500 within three months. Experience shows that if rate hikes are faster than market expectations, volatility will significantly increase.

Interpreting earnings reports: a comprehensive view from revenue to guidance

Earnings reports are key to judging US stock market trends. The focus should be on the growth trends of revenue and profits, as well as comparisons with competitors and Wall Street expectations. In 2023, tech giants’ stock prices rose due to better-than-expected cloud revenue, while traditional retail struggled as rising costs squeezed profit margins, reflecting differentiated performance.

It is also important to note that forward guidance often has a greater impact on stock prices than current figures. Even if earnings meet expectations this quarter, management lowering future outlooks usually results in negative reactions. Additionally, in a high-interest-rate environment, markets pay more attention to free cash flow and debt structure; during economic recovery, they focus on investment directions and potential returns of new growth engines.

The relationship between P/E ratio and economic cycles

Long-term, US stock market movements follow earnings changes, but the P/E ratio has limited predictive power for short-term trends. In most of 2022, due to investor exuberance, the market P/E was at expensive levels until the Fed sharply raised interest rates, bringing the P/E back to historical averages. This suggests investors should compare current P/E ratios with historical levels under similar economic conditions to assess valuation fairness.

Using industry cycles to grasp US stock market trends

The S&P 500 covers 11 major industries, each with different sensitivities to economic cycles. Investors need to adjust sector allocations flexibly according to the economic stage.

Information Technology is the heaviest weighted sector, characterized by its “long duration” (future earnings proportion), making it highly sensitive to interest rates. Tech stocks tend to be the most volatile, requiring close attention to valuation levels.

Financials are highly sensitive to the economy; the best entry point is during economic recovery from recession. The worst timing is just before a downturn, as economic weakness increases bad debt risks. Although rising interest rates generally benefit banks’ income, fears of recession caused by rapid rate hikes can suppress financial stocks.

Consumer Discretionary includes retail, dining, travel, automotive, and construction sectors. Consumers tend to cut discretionary spending first during economic hardship. However, individual stocks vary greatly; for example, McDonald’s, as an affordable fast-food chain, may perform counter-cyclically during recessions.

Healthcare is a defensive sector, often attracting funds when economic growth concerns rise. Since healthcare spending is mostly essential, demand remains stable regardless of economic strength. The main risk comes from government policies on drug pricing.

Technical analysis of US stock market trend reversals

Moving Averages: catching trend change signals

Moving averages are like the cost line of stock prices. When a short-term moving average (e.g., 20-day) crosses above a long-term average (e.g., 50-day), it forms a “golden cross,” typically signaling the start of an uptrend; the opposite “death cross” indicates potential decline.

For example, Tesla formed a golden cross on July 29, 2024, and then surged over 100% in five months. Conversely, Netflix between late 2021 and February 2022 saw the 20-day moving average repeatedly cross below the 50, 100, and 200-day averages, with the stock falling over 70%.

Relative Strength Index (RSI): identifying extreme conditions

RSI helps determine if a stock is overbought or oversold. An RSI above 70 suggests overbought conditions and potential pullback risk; below 30 indicates oversold conditions with possible rebound opportunities.

Apple’s RSI in early March 2024 fell below 30 (bottomed at 22), then rebounded, gaining over 40% within a year. However, in strong uptrends, RSI can become unreliable; for example, Nvidia during the 2024 AI boom maintained high RSI levels while the stock continued rising, demonstrating the strength of the trend.

Volume confirmation: verifying breakouts

“Price breakouts need volume confirmation” is a key principle in technical analysis. When Nvidia broke through previous highs in May 2023, volume surged 79%, confirming the breakout. Conversely, Amazon’s failed breakout in September 2022 was accompanied by declining volume, indicating insufficient buying pressure.

Chart patterns: predicting reversals and consolidations

Head and Shoulders is a classic reversal pattern. Meta formed a typical head and shoulders from September 2021 to February 2022 (left shoulder at $385, head at $352, right shoulder at $336). After breaking the neckline, the stock continued to decline by 25%.

Cup and Handle often signals a bottoming process before a rally. Microsoft took 10 months to build a cup and handle pattern in 2022-2023; with volume shrinking during the handle’s correction (8%), a breakout in January 2023 led to a 45% rally.

Rising Wedge appears as prices reach new highs but with weakening momentum and narrowing trading ranges. Vanguard Financial ETF formed a rising wedge from October 2022 to March 2023; such breakouts often go against the previous trend, requiring caution.

It is important to emphasize that relying on a single technical indicator can lead to misjudgments; effective analysis usually combines multiple signals.

Using market sentiment indicators to identify US stock market turning points

Markets tend to cause the greatest pain to the most people. When most investors are bearish or under-allocated, the market often rises. Sentiment indicators are most valuable at extreme levels.

VIX Volatility Index (the “Fear Index”) is the most well-known sentiment indicator for US stocks.

CNN Fear & Greed Index is a composite indicator considering price momentum, put/call ratios, junk bond spreads, and market breadth. High readings indicate greed and increased risk appetite. “Extreme fear” often appears at market bottoms, such as when the S&P 500 hit its yearly low in October 2022; “Extreme greed” suggests caution.

Investors Intelligence Advisory Sentiment Report is based on over 100 independent market analysis reports. When too many advisors are on the same side, it often signals a contrarian opportunity.

Additional indicators include NAAIM Exposure Index, CBOE Put/Call Ratio, and AAII Investor Sentiment Survey.

Recognizing cyclical patterns in US stock market trends

Three main sources of upward momentum

First, the combination of corporate profitability and market confidence. Earnings are fundamental, but market sentiment can temporarily boost valuations.

Second, abundant liquidity environment. The Fed’s easing policies inject massive funds into the market; even with moderate fundamentals, stocks can surge.

Third, technological innovation and future expectations. During the 1995-2000 internet revolution, despite less than 20% user penetration, the Nasdaq surged over 5 times on future imagination alone. Currently, the AI boom is similar; many AI-related companies are valued with no profits yet.

Three triggers for downward risk

Concerns about recession often appear 6-9 months before actual downturns. In October 2007, the market peaked before economic data worsened, as expectations had already adjusted. After recession confirmation, “Davis Double Dip” occurs: profits decline and P/E ratios compress. In 2008, earnings of S&P 500 companies fell 40%, and P/E ratios shrank from 17x to 10x, intensifying the decline.

Valuation bubble bursts are most evident during rate hike cycles. During the 2000 dot-com bubble, Nasdaq’s P/E ratio exceeded 100x, and the index fell 65% over two years. After the 2022 rate hikes, high-growth stocks like ARK Innovation Fund declined over 50%.

Liquidity tightening impacts directly affect stocks. Fed rate hikes and balance sheet reductions squeeze liquidity, which explains why markets are especially volatile when rate hikes are faster than expected.

Comprehensive analysis framework for US stock market trend judgment

Sophisticated investors should establish a multi-dimensional analysis framework: monitor macroeconomic conditions, industry trends, company performance, Fed policy, valuation levels, technical signals, and investor sentiment indicators. These factors interact and jointly determine the short- and long-term performance of the US stock market.

In a high-interest environment, markets become more pragmatic, focusing on cash flow quality and debt structure. During economic recovery, attention shifts to growth strategies and expected returns. Multiple technical indicators should be interpreted together; relying on a single signal can mislead decisions. Sentiment at extreme levels often has predictive value and can inform trading decisions but should not be the sole basis.

The core of understanding US stock market trends lies in how these multiple factors interact and how their relative importance shifts across different market environments. Investors need to pay attention to both fundamental changes and market sentiment, using technical tools as confirmation, ultimately forming a more complete market understanding.