The Strait has reopened as anticipated, yet the HALO trade remains confined to U.S. markets.
Following the signing of a memorandum of understanding between the U.S. and Iran, the drop in oil prices led to a rapid decline in inflation expectations. However, real interest rates have not fallen in tandem. The market continues to actively price in a tightening monetary environment, with the U.S. dollar index exhibiting strength. This dynamic is primarily driven by two factors: first, the upturn in the U.S. economic fundamentals spurred by AI investments; second, the U.S. government's proactive stance on reshaping dollar credibility. Consequently, pro-cyclical trades are increasingly concentrated in the U.S. stock market, while overseas markets face significant pressure. A decline in U.S. real interest rates may require a relative weakening in U.S. economic data to drive down market expectations for monetary tightening.
In the short term, factors such as the World Cup effect, the U.S. housing bill, and personal tax rebates from the "Great Beauty" act may lend resilience to U.S. economic data. From a medium-term perspective, the sustainability and diffusion of AI investment remain the core variables. Notably, the increased uncertainty surrounding these variables is a primary source of current market divergence and volatility.
AI-driven inflation is spilling over, and future attention should focus on whether the AI investment supply chain exhibits a "stagflationary" scenario where price increases outpace volume growth.
The rapid development of the industrial wave has led to widespread shortages and price hikes, allowing AI hardware to benefit from negative real interest rates. This is a key reason why tech stocks have performed strongly in this high-interest-rate environment. The AI investment chain is in a clear "overheating" cycle and has not yet entered a stagflation phase. However, as the broad and persistent price increases in the AI industrial chain continue to spill over, the old and new worlds are beginning to converge. This past Thursday, June 25, 2026, a leading company widely recognized for its massive shipment volume and strong bargaining power in the traditional consumer electronics sector, Apple Inc., significantly raised its product prices. This move appears to signal that the erosion of profits from the traditional world is nearing its limit. Concerns about the collapse of traditional demand are now negatively impacting the performance of tech stocks in the upstream hardware segments related to AI.
Of course, consumer electronics represent traditional demand and do not necessarily indicate the arrival of the stagflation cycle in AI investment that we previously highlighted. The hallmark of a stagflation cycle is typically the transmission of upstream price increases down the chain, ultimately suppressing demand. Looking ahead, the ability of downstream players in the true AI infrastructure investment segment—such as chipmakers like NVIDIA Corp., Advanced Micro Devices, Inc. (AMD), and Broadcom Inc., along with AI server providers—to pass on costs, their final gross margin performance, and the acceptance of end-cloud vendors will become crucial. The upcoming mid-year reporting season will be a key validation point. In fact, during the U.S.-Iran conflict, the high-growth and relatively independent safe-haven attributes of AI tech stocks made them the market's core theme, benefiting from low-volatility gains. Currently, as the U.S. economic cycle is already in an upturn, traditional industry assets have begun to rise significantly following the tech sector's entry into a high-volatility phase, with the industrial sector showing signs of recovery. However, this phenomenon is not as pronounced globally. In the future, the world will need to monitor the recovery of manufacturing activity following the Strait's reopening. If this coincides with changes in the price-volume cycle of the AI industry, market styles could undergo a rebalancing.
Reshaping dollar credibility and AI investment prosperity are in resonance, but also contain fissures.
The cycle of the U.S. reshaping dollar liquidity can be understood as follows: AI technological progress leads to industrial investment, driving economic recovery, which in turn provides more support for monetary policy discipline. This attracts capital back to U.S. dollar assets, further supporting AI capital expenditures, while U.S. Treasury yields paradoxically decline. However, the fissure lies in this: reshaping dollar credibility requires slowing the expansion rate of M2 relative to GDP since 2009, but the U.S. stock market capitalization to M2 ratio is already at historically high levels. Continued refinancing and new IPO financing in U.S. stocks are needed to support capital expenditures, yet upstream inflationary pressures further heighten this requirement. Currently, a triangle of a strong dollar, strong AI, and a strong economy is forming, but it is not a stable structure. Investors need to continuously monitor its evolution.
Preparing for both realities in a converging world.
As the pricing of the old and new worlds gradually converges, we offer two strategies for navigating the contracting market environment. First, in the absence of clear "stagflation" signals from the new world, investing in the sources of inflation remains a reasonable strategy to embrace the "center of the circle," even though volatility may amplify during the contraction. This is especially true for segments where demand is already heavily sourced from the new world represented by AI and is less affected by the collapse of traditional world demand. Examples include semiconductors/AI materials, semiconductor equipment, and manufacturing, which benefit from demand driven by both midstream capacity expansion and downstream capital expenditures.
Second, from a risk-reward perspective, given the increasingly extreme investment divergence between the old and new worlds, other major sectors may also warrant attention for potential "mis-priced" opportunities in the traditional world that could surprise during the upcoming mid-year reporting season. Data from May 2026 on industrial enterprise profits show that the mining and raw material manufacturing sectors in the mid-to-upstream still maintain relatively superior performance. Among them, chemicals and non-ferrous metals are the only two industries, besides electronics manufacturing, where the cumulative year-on-year profit growth rate in May remained above 50%. Furthermore, based on performance forecasts disclosed up to June 27, 2026, excluding TMT sectors, some companies in lithium batteries and chemicals have also demonstrated unexpected resilience in their performance.
Additionally, if non-U.S. demand, manufacturing PMI, emerging market investment, and export structures improve subsequently, the pro-cyclical sectors in the A-share market could transition from valuation repair to earnings repair. The elasticity of sectors such as industrial metals, petrochemical refining, automotive parts, specialized equipment, general equipment, and other power equipment will depend more on the verification of these indicators. Moreover, if the market experiences significant volatility amplification during the contracting phase in the future, the defensive attributes of high-dividend assets are also likely to become prominent.
Risk Factors
Domestic economic recovery falling short of expectations: If subsequent domestic economic data weakens beyond expectations, the assumption of a stabilization and recovery in corporate capital returns mentioned in the analysis would no longer hold.
Significant downturn in overseas economies: If overseas economies experience a sharper-than-expected downturn, the synchronized recovery in global manufacturing could stall, and demand for physical assets would also slow.
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