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Perspectives on the Current Market Correction's Duration and Depth
Global risk assets navigated the week without major mishaps, as a series of anticipated liquidity tests passed, with outcomes generally surpassing market expectations. Early-week volatility, amplified by equity "deleveraging" in South Korea and escalating tensions between the US and Iran, subsided as US May inflation data met expectations and signals of renewed US-Iran de-escalation emerged, stabilizing market sentiment. The previously feared impact of a potential SpaceX listing also proved relatively mild.
Looking ahead, market focus centers on two key questions: First, has the current correction run its course? Will next week's series of liquidity pressures still pose significant risks? Second, given the sharp rebound in overseas tech stocks on Friday, why did A-share market style shift dramatically? When might a "better time" for the tech sector emerge? We offer insights on these questions from several dimensions:
Firstly, for the overall market, the sequential resolution of earlier risks, manageable upcoming liquidity tests, and a decline in market congestion to low levels suggest limited risk of further significant declines. First, after recent consolidation, our constructed All-A congestion index has fallen to the bottom range near -2 standard deviations, indicating limited downside risk. Second, Iran has confirmed that a US-Iran agreement is imminent, and the easing of geopolitical tensions will stabilize market expectations. Third, while the market faces liquidity tests next week including a potential Bank of Japan rate hike, the Fed meeting, and a speech by Fed's Waller, market expectations are already well-absorbed. Coupled with lower-than-expected US core CPI and easing oil price pressures, the necessity for the Fed to adopt a hawkish stance is significantly reduced, keeping overall risks under control.
Secondly, for the technology sector, drawing on experiences from the current AI wave and previous tech/internet cycles, the Nasdaq's correction in terms of magnitude is largely complete, but the duration appears relatively short. Historically, excluding extreme risk events, a ~10% drawdown represents a threshold for the Nasdaq's maximum pullback, while 20-30 trading days of consolidation aligns with past patterns. In the current cycle, from June 3rd to June 10th, the Nasdaq corrected by 7.1%, nearing that ~10% threshold, but the adjustment period is shorter than historical norms. Considering the ongoing "earnings vacuum" and "liquidity headwinds" ahead, the tech sector may still face a period of consolidation, but the risk of another major decline is also limited.
Finally, for A-shares, Friday's session revealed that besides the influence of overseas markets, the domestic tech sector also needs to digest its own issues like high congestion. The "better time" for a sustained tech trend recovery may arrive after the July earnings season begins and growth advantages are reconfirmed. In recent years, high-growth sectors with strong industry trends, such as new energy in 2020-2021 and optical modules since 2024, have shown a common pattern: launching major rallies at the start of earnings seasons and digesting congestion during interim periods. Therefore, after a short-term, overseas-induced rotation and consolidation during the current earnings vacuum, July will usher in a new phase of concentrated catalysts from both domestic and international tech company earnings, potentially marking the "better time" for the tech trend's return.
Consequently, looking forward, for the overall market, the sequential and better-than-expected resolution of earlier risks, manageable upcoming liquidity pressures, and congestion falling to bottom levels suggest controllable risk of further sharp declines. For the tech sector, the magnitude of the prior correction is largely sufficient, but given the ongoing "earnings vacuum" and "liquidity headwinds," the awaited "better time" for a sustained tech recovery may come after the July earnings season begins and growth strengths are revalidated.
Key Performance Clues to Watch in the Interim Reports
Regarding the strategy for this cycle, we consistently emphasize that rotation for its own sake is unnecessary; the relative strength of growth and changes in performance remain the core drivers of rotation.
First, the primary driver of A-share pricing this year has shifted to earnings and growth. After two consecutive years of valuation expansion, the main pricing factor for A-shares this year has transitioned from valuation to earnings, and from expectations to reality. Based on the performance of a series of factors we track, growth indicators like revenue growth, order growth, net profit growth, and active fund holdings have become crucial "dividing lines" for market structure this year, making growth the core of current market pricing.
Second, as the earnings disclosure period nears and the effectiveness of growth investing increases, the market's focus on performance will intensify. From June to the first half of July, with the interim report pre-announcement period approaching, the efficacy of growth investing will rise again. For this year, A-shares are not lacking in earnings clues. Positioning based on growth logic represents a strategy with better odds of success and favorable risk-reward in the current window.
Therefore, regarding allocation strategy, we reiterate that rotation for its own sake is not required. As the July earnings pre-announcement period approaches, the relative strength of growth and changes in performance remain the core clues. We recommend closely following interim report performance signals for positioning.
Based on revisions to 2026 consensus earnings estimates for various sectors following the Q1 reports, we have screened directions with potential for stronger interim report performance. Sectors with significant upward earnings estimate revisions post-Q1 are concentrated in:
AI Computing: Semiconductors, Optical Communication, Components, Electronic Chemicals.
Advanced Manufacturing: Shipbuilding, AI Equipment, Batteries & Energy Storage.
Cyclicals: Non-ferrous Metals, Petrochemicals (Chemical Fibers, Agrochemicals, Refining, Plastics, etc.), Shipping & Ports, Coal.
Consumer & Finance: Jewelry, Commerce & Retail, Non-Bank Financials.
Among these, the AI computing sector (including North America supply chain segments like optical communication and PCBs, and domestic supply chain segments like semiconductors), with its more pronounced growth advantages and higher market consensus, remains worthy of continued focus. Additionally, within the pool of sectors with strong earnings, the easing of geopolitical tensions can serve as an important trading theme, with directions including non-ferrous metals, chemicals, refining, and oil shipping warranting attention.
Risk Disclosures
Fluctuations in economic data, policy easing falling short of expectations, slower-than-expected Fed rate cuts, and escalation of geopolitical conflicts.
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