Following a week of trading, the market has shown clear signs of becoming desensitized to geopolitical conflicts. Three key questions have emerged frequently among investors: To what extent has the market's position covering progressed? What new trends and clues can be drawn from the Q1 earnings reports? Historically, what characteristics have signaled turning points in industry trend rallies? Analysis of capital flow and positioning data indicates that the current phase of position rebuilding is not yet complete. However, the strength of the reversal factor during this recovery has been notably weaker than in past cycles, with a clear narrowing of focus across sectors.
Regarding Q1 earnings, companies that have already reported show significantly higher profit elasticity compared to revenue elasticity. Improved profit margins are a common theme, with the technology and cyclical sectors demonstrating particularly strong momentum. The three primary drivers of Q1 growth are identified as "China's leading manufacturing, AI infrastructure, and non-bank financial services."
Addressing the market's primary concern about the trajectory after an acceleration in industry trends, a review of five historical industrial cycles reveals that inflection points in rallies typically coincide with price turning points in the supply chain's tightest segments. For the current North American AI hardware cycle, the most critical indicators to monitor are the prices of DRAM, indium phosphide, glass fiber, and gas turbines. From an allocation perspective, the fundamental logic for portfolio construction remains centered on the revaluation of pricing power within China's leading manufacturing sector.
**Current Stage of Market Position Rebuilding** The process of position rebuilding is ongoing but is now entering a phase of structural differentiation. After a sharp market-wide reduction in positions, markets typically progress through three stages: broad-based position covering, structural differentiation in covering, and rotation of existing capital. We believe the market is transitioning into the second stage. From a micro-funding perspective, active capital, represented by leveraged funds and small-to-mid-sized hedge funds, still has room to increase positions following the rapid rebound. Data from CITIC SEC channels indicates that the average position of sampled active hedge funds dropped from 82.9% in late February to 78.4% by the week of March 27th, before recovering to 80.3% by April 11th. Leveraged funds have shown resilience during this correction, with margin debt balances recovering from 2,596.4 billion yuan on March 24th to 2,648.9 billion yuan by April 16th, nearly returning to late-February levels, though still below the January peak of 2,725.2 billion yuan.
Conversely, conservative absolute return funds, such as insurance funds, wealth management subsidiaries, and 'fixed-income plus' strategies, are estimated to hold positions lower than at the end of February. Data on subscriptions and redemptions for 'fixed-income plus' products shows that the funds flowing back during the April rebound were less than the total outflows seen in March. Additionally, private fund filings in February and March were among the highest since July 2025, and new A-share account openings in Shanghai hit the third-highest level since September 2024, increasing 50.1% year-on-year, indicating potential incremental capital.
During this recovery, the strength of the reversal factor has been significantly weaker than in past instances, such as the Q2 2018 US-China trade war, Q1 2022 Russia-Ukraine conflict, Q1 2024 micro-cap liquidity shock, and the 2025 tariff war. Historically, sectors that fell more deeply during a shock subsequently outperformed those that were more resilient or rose against the trend. In the current rebound, however, the most resilient assets from March have shown the greatest elasticity in April. This reflects the unique nature of this rebound: while the economic impact of the Iran conflict is highly uncertain, the AI hardware sector exhibits extremely strong industrial momentum, leading capital to focus rather than diversify when rebuilding positions. The market is pricing in short-term desensitization to the conflict but has not dismissed the medium-term impacts of potential supply chain disruptions. These impacts, however, manifest in various factors like rising costs, market share shifts, inventory restocking pace, and demand strength, creating uncertainty in cost-volume-profit analysis for most manufacturers. This necessitates further monitoring, making it more appropriate for short-term capital to focus on sectors like technology and innovative pharmaceuticals, which are temporarily less affected.
**New Trends and Clues from Q1 Earnings** Among the 306 sample companies that had disclosed Q1 reports or previews by April 17th, 74.8% reported net profit growth. The median revenue growth was 11.4%, while the median net profit growth was a substantial 41.2%. At the sector level, the most explosive profit growth was concentrated in technology and cyclical industries. However, Q1 reports also revealed some macro factors squeezing profits, with exchange rate fluctuations/translation losses being the most frequently cited, followed by rising raw material costs and industrial overcapacity.
The three main themes driving Q1 growth are "China's leading manufacturing, AI infrastructure, and non-bank financial services." In terms of cited growth drivers, "AI computing power and data centers" was the most frequently mentioned industrial demand at 13.2%, similar to the proportion in annual reports (12.5%). The mention frequency for non-ferrous metals (10.5%), lithium batteries and energy storage (9.6%), securities and capital markets (9.6%), and photovoltaics and wind power (9.6%) all increased significantly compared to the 2025 annual reports. Notably, the frequency of mentions for "exports and overseas markets" fell sharply to 10.5% from 17.3% (the highest) in the 2025 annual reports. Compared to last year, the impact of rising energy and chemical prices on external demand, coupled with the rapid and sustained appreciation of the RMB affecting cost advantages and exchange gains/losses, has significantly increased the uncertainty surrounding the export and external demand performance narrative. At the individual stock level, "China's leading manufacturing, AI infrastructure, and non-bank financial services" form the three clearest threads for high profit growth.
**Historical Characteristics of Inflection Points in Industry Trends** Historically, inflection points in industry trend rallies typically coincide with price turning points in the supply chain's most constrained segments. Every major super-cycle often begins when prices in the tightest part of the chain stabilize at low levels and begin to rise, and ends when those prices stabilize at high levels or show marginal softening. Equity markets usually price in these turning points ahead of time. Once a consensus narrative on terminal demand forms, price itself becomes the most sensitive and leading indicator of景气度 (prosperity). This is because any acceleration in marginal demand is amplified into significant price increases under conditions of supply rigidity. In other words, the true anchor for a trend reversal is usually the process where prices in the tightest segment transition from accelerating growth to high-level stabilization, and then to marginal softening.
A review of several historical super-cycles—the 2003-2004 "Five Golden Flowers" rally, the 2005-2007 non-ferrous metals super-cycle, the 2019-2022 new energy vehicle lithium battery cycle, the 2019-2021 photovoltaic cycle, and the 2020-2022 semiconductor chip shortage—yields several observations. First, stock price inflection points usually lead commodity price inflection points. Therefore, waiting mechanically for commodity prices to peak or trough before trading stocks is often too late, as evidenced repeatedly in copper, aluminum, coal, and lithium. Second, price signals are most effective only during the phase where "industry bottlenecks exist, and profits concentrate in tight segments." If an industry is already in widespread overcapacity, or if price movements are driven by policy pulses or cost-push factors rather than genuine shortages, the guidance from prices for stock prices weakens considerably. Third, liquidity and policy environments can amplify or suppress price signals.
For the current North American AI hardware cycle, the most critical variables to monitor are DRAM, indium phosphide, glass fiber, and gas turbines. If seeking an anchor or key signal asset for the AI hardware cycle, the focus should not be on GPUs (where utilization is relatively low due to non-uniform training and inference standards, leading to a theoretical surplus of computing power). Instead, attention should be on the product prices of four segments that are forming or have already formed bottleneck pricing power: DRAM, indium phosphide, glass fiber, and gas turbines. These correspond to the four critical infrastructure chains determining the expansion slope of AI data centers: storage, optical switching/interconnects, AI PCBs, and backup power supply. Both commodity prices and the prices of representative stocks can be monitored.
**Sustained Momentum Requires Disciplined Strategy: Maintain Focus on China's Leading Manufacturing** The short-term rally is a result of concentrated position reductions in March, followed by panic-driven position increases in early April due to unexpected developments in the conflict. In March, the North American AI supply chain demonstrated remarkable resilience. The GTC conference attracted a record number of domestic investors to the US, and their subsequent analysis and internal reporting upon return will likely reinforce market confidence in the AI chain's momentum. The combination of resilience during the market adjustment,密集 (dense) industrial feedback, urgent needs for position covering, and Q1 earnings catalysts has created an emotional pulse, even leading to a siphon effect on other sectors, which is understandable. However, the revaluation of pricing power for China's leading manufacturing is not confined to communication devices alone. Profit margin improvement is a broad, long-term trend, albeit with varying timing across sectors. The rally has longevity and resilience, and there are numerous sectors capable of generating profits. Investors should not let short-term emotional pulses disrupt their allocation strategy and rhythm.
The underlying logic for allocation remains the revaluation of pricing power in China's leading manufacturing. The most representative sectors continue to be new energy, non-ferrous metals, chemicals, and power equipment. Among these, the chemical sector may see the most pronounced catalysis from Middle East supply disruptions and subsequent cyclical price increases. Non-ferrous metals are also expected to gradually re-establish pricing based on their resource attributes once liquidity shocks subside. We highlight the need to closely monitor the progress of domestic AI development. On the hardware side, the logic of "volume" expansion might be the segment within the AI chain with the largest expectation gap currently; close attention should be paid to the release of DeepSeek V4. Innovative pharmaceuticals are gradually charting an independent course and may be suitable for capital pricing industrial logic, especially during times of high macroeconomic uncertainty. Furthermore, it is advisable to continue increasing allocations to some undervalued sectors, with a focus on brokerages and insurance. For cyclical commodities experiencing price increases, short-term volatility will be influenced by crude oil futures fluctuations. However, the physical realities of shipping lane disruptions, accumulating spot shortages, and the spreading impact of supply chain中断 (disruptions) are真实 (real) occurring. While desensitization is a short-term market phenomenon, over the longer term, the market will price in these facts, warranting continued close monitoring.
**Risk Factors** Escalating friction between China and the US in technology, trade, and finance; weaker-than-expected domestic policy support, implementation effectiveness, or economic recovery; tighter-than-expected macro liquidity conditions domestically and internationally; further escalation of regional conflicts such as Russia-Ukraine and the Middle East; slower-than-expected digestion of China's real estate inventory.
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