On May 21, the A-share market experienced a roller-coaster session. Major indices opened higher and rallied in the morning but took a sharp turn downward in the afternoon, with the AI industrial chain leading a broad market decline. By the close, the Shanghai Composite Index had fallen 2.04% to 4077.28 points, breaching the 4100-point psychological level and marking its largest single-day drop since March 24 of this year. The Shenzhen Component Index fell 2.07% to 15247.27 points, while the ChiNext Index dropped 2.35%. The STAR 100 Index tumbled 5.23%, becoming the worst-performing major index of the day. Regarding concerns over potential overvaluation in the AI industrial chain, a lead foreign brokerage strategist noted that earnings growth within the sector has absorbed valuation pressures, suggesting current levels are not excessive. Furthermore, the trend of foreign capital returning to the Chinese stock market is evident, with a shift in preference from consumer sectors towards technology and advanced manufacturing. Structural opportunities are expected to persist following the market adjustment. The market initially strengthened in the morning session, driven by sectors like securities brokers and humanoid robots, but quickly reversed course in the afternoon. The AI industrial chain became the hardest-hit area, while some defensive sectors and emerging growth tracks bucked the downtrend. Analysis suggests that the significant prior gains in the AI sector, coupled with elevated valuations, prompted some profit-taking during today's market volatility. Additionally, several industry-specific catalysts contributed to the sharp decline in the AI chain. First, following Nvidia's better-than-expected earnings report yesterday, concerns emerged about a potential "sell the news" reaction. Second, AI-related concepts in the Hong Kong market also saw notable adjustments today. Reviewing the Hong Kong session, large model and internet platform sectors exhibited a pattern of opening high and closing low. Recently, Baidu released its Q1 2026 financial report, showing a net profit of 3.4 billion yuan, a 55% year-on-year decrease. While revenue from new AI businesses exceeded 50% for the first time, profits were weighed down by high investment, affecting market expectations for other AI platform companies. A senior technology analyst at a securities firm noted that a variable for the AI industry this year cannot be ignored: the potential listing of three leading AI companies—OpenAI, Anthropic, and SpaceX—on the U.S. stock market. The impact of this on the market warrants close investor attention. It is worth noting that rumors circulated regarding today's decline. A chief strategist at a brokerage advised investors not to be swayed by rumors, stating that the AI industry trend will not end because of them. It is normal for individual stocks that have seen substantial gains recently to experience short-term corrections. Despite significant prior gains in the AI industrial chain and growing market divergence, several leading institutions remain optimistic about the sector's future development. Addressing concerns that AI-related gains may have been excessive, JPMorgan Chase's China equity strategist Zhang Xiaoning stated at a public event yesterday that the overall valuation of the AI industrial chain, whether measured by price-to-earnings or price-to-sales ratios, is not excessive. "Last Q4, valuations were more than three standard deviations above the mean. They have now retreated from that peak to around two standard deviations. This is because the earnings of related industrial companies are continually progressing forward, which has, to some extent, digested the valuation," Zhang explained. Zhang further pointed out that the trend of foreign capital returning to the Chinese market has become quite apparent. "Over the past two years, overseas investors, particularly regional funds, have significantly reduced their underweight positions on China. For instance, active funds in the Asia ex-Japan category have reduced their China underweight from -8.3% at the end of February 2024 to -1% based on our latest tracking. Emerging market-focused active funds have reduced their China underweight from approximately -4.5% at the end of January 2024 to the current -2%." "Global funds have also shown a clear upward trend in reducing their China underweight in January and February this year, moving from around -2% to -1.7%. This magnitude might not sound as large as that for regional funds, but we must recognize that the asset base of global funds is much larger—their assets under management are about five times that of regional funds. Even a slight adjustment by them can bring a considerable influx of capital," Zhang stated. According to Zhang, statistics show that as of May 15, Chinese equities have recorded a net inflow of $13.1 billion year-to-date, based on EPFR data which tracks the fund flows of overseas-listed public funds. "We can see that the fund flows under this measure from the beginning of this year to date are significantly higher than the levels seen in the same periods over the past three to four years. This also supports the clear trend of foreign capital increasing allocations to Chinese assets," Zhang said. Notably, Zhang observed that foreign capital's specific choices within Chinese assets are also shifting from the previously favored consumer sectors towards the technology field. "Feedback from our roadshows indicates that, influenced by the overall AI industry wave, concerns over energy security, and long-term expectations for the robotics sector, we are seeing overseas investors gradually shift their focus from traditional internet giants to paying more attention to the advanced manufacturing field." Despite today's significant adjustment, the market did not weaken across the board, and structural opportunities remain. The large financial sector, represented by securities brokers, performed well for a period today. Emerging tracks like the automotive industrial chain and humanoid robots also strengthened against the broader downtrend. The humanoid robot theme has recently garnered widespread market attention. Zhang told reporters, "Supported by relatively ample market liquidity and against the backdrop of overall stable and improving corporate earnings, we are focusing on high-quality growth. Within related targets, there are three core directions: the AI ecosystem, robotics, and energy security."
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