Last week's analysis pointed out that the market's expectation of a Federal Reserve rate hike stems from a new pricing of high interest rates on the technological revolution. The macro market changes reflected by high interest rates represent a deep contest between the profits of industrial capital, driven by the structural paradigm shift led by the AI technological revolution, and the interest of financial capital. This contest is an ongoing performance of consensus and divergence among different investors regarding market trends, structure, and rhythm as the global economy enters a new Kondratieff cycle, marking a divergence not only in values but also in the balance between investment returns and risks for optimists and pessimists.
Our view has remained consistent: capital markets inherently require optimists. Short-term adjustments in growth are inevitable, but optimism is still necessary after these adjustments. As the situation in the Middle East returns to normal, the approach to asset allocation needs to realign with the broader path of cyclical evolution.
Review of Last Week's Market: Tech and Materials Rise, Coal Weakens
As of June 16, 2026, the past month has seen dramatic movements in global asset classes. Markets are generally in a repricing phase under the triple constraints of "high interest rates, weak demand, and geopolitical disturbances." Equity markets attempted a structural shift from technology and growth towards value and defense, but disappointment with established policies outweighed expectations. Globally, bonds and cash served as safe-haven anchors, while technology and resource cycles presented alpha opportunities. Commodities experienced increased volatility due to geopolitical and inflationary pressures. From the most recent week's data, several conclusions can be drawn.
First, the market last week played out a structural rotation between old and new growth drivers, with domestic and international assets moving in tandem. The underlying drivers rested on two main themes: the repair of liquidity expectations and supply constraints within cycles, leading to a clear hierarchical characteristic in asset pricing.
Second, from a broad asset class perspective, the STAR 50 Index surged 9.5% and the ChiNext Index rose 5.8%, leading gains among risk assets. The Nasdaq 100 also moved higher, creating a positive correlation between domestic and international growth assets. This confirms that the marginal easing of expectations, stemming from the global shift from rate hikes to a pause, has lifted risk appetite. The growth rally is not merely speculative sentiment; it represents a dual boost from bottoming valuations and improving industry earnings expectations. In contrast, commodities diverged sharply. Industrial metals like non-ferrous and steel strengthened, while energy commodities such as crude oil, coking coal, and LME aluminum weakened significantly. ICE Brent crude fell 11.6% for the week, putting pressure on traditional energy as market focus shifted from fossil fuels to industrial cyclical products. Fixed-income assets traded in a narrow range with minimal volatility, as funds flowed into equities and commodities.
Third, sector-level divergence further amplified the market's structural characteristics. The non-ferrous metals sector led A-share gains with a 12.8% rise, followed by building materials and electronics. Reflation trading continued to develop, with expectations of a rebound in overseas manufacturing and upstream supply constraints boosting the price elasticity of resource products. The coal and petrochemical sectors saw significant pullbacks, as the long-term valuation pressure from the green transition combined with high-frequency weakness in domestic demand led to capital flight from traditional energy. The simultaneous strength in growth and cyclical sectors formed a "barbell" configuration: growth provides the base, while cyclicals lead the charge.
The analysis above indicates that current expectations for loose liquidity support the continuation of the market trend, but the rapid short-term gains in cyclical sectors carry a risk of correction.
End of Unexpected Shocks
With the agreement reached between Iran and the United States, the unexpected market disturbance that lasted for months has ended, allowing investors to re-enter the primary track of the previous cyclical evolution. Although this disturbance has concluded, its effects will not dissipate immediately. What factors will significantly impact asset allocation?
The first is the change in global risk appetite. The copper-to-gold ratio serves as an anchor for pricing risk assets, while the VIX is a gauge of panic sentiment; the two inversely reflect market risk appetite cycles. From early 2024 through the first quarter of 2025, the copper-to-gold ratio declined persistently, and the VIX spiked multiple times, indicating a dominant global risk-off sentiment: markets sold copper and hoarded gold for safety, U.S. stock volatility amplified, and risk appetite continued to weaken.
After the second quarter of 2025, the copper-to-gold ratio bottomed, stabilized, and began a gradual ascent, while the VIX's central level declined, and its spike peaks moderated. Funds gradually reduced gold holdings and increased allocations to copper, representing real economic demand, indicating a marginal repair in risk appetite. Since 2026, the copper-to-gold ratio has accelerated its rise, and the VIX has maintained low-level fluctuations, suggesting that expectations for global liquidity easing are heating up. Markets are trading on reflation and manufacturing recovery, with risk appetite continuing to recover. Only during brief periods of minor VIX rebounds did the copper-to-gold ratio experience short-term pullbacks, indicating that short-term panic does not alter the medium-term trend of improving risk appetite, corresponding to the valuation repair in equities and industrial cyclical products.
The second is inflation expectations. Brent crude oil and the U.S. core CPI show a high degree of long-term trend resonance. Oil is a key input variable for inflation; its price movements directly transmit to midstream and downstream costs, driving inflation in the same direction. The oil price surge in 2021-2022 drove significant inflation increases, followed by a synchronized decline. Currently, with the easing of the Middle East situation, oil supply shocks have weakened, upward momentum in oil prices has diminished, and the pace of U.S. core inflation increase has subsequently slowed. Inflation constraints have eased marginally, opening space for global liquidity easing.
The third is the Federal Reserve's rate hike expectations. Our previous analysis clearly stated that based solely on non-farm payroll data, it would be difficult for the Fed to raise rates immediately. Therefore, we anticipate that at the first meeting under new Chair Kevin Warsh, the Fed will keep interest rates unchanged. An important reason is that after the U.S.-Iran peace agreement restored passage rights in the Strait of Hormuz, Treasury yields fell, easing concerns about inflation and rate hikes. Of course, the Fed faces a severe test, as other developed market central banks have already begun their rate hike cycles. The Bank of Japan, at its June meeting, voted 7-1 to raise its key short-term rate by 25 basis points to 1.0%, the highest level since September 1995. This decision, aimed at preventing broader inflation from worsening due to energy shocks from the Iran situation, also marked the central bank's first rate hike since last December.
The fourth is the direction of global capital flows. With SpaceX's listing on the Nasdaq, competition for capital in the global technology growth arena has intensified, with high-growth overseas tech assets diverting cross-border capital. Exchange rates are priced based on the differential in domestic and international economic momentum. The relatively weak pace of China's economic recovery and profit repair, compared to the U.S. tech sector's main trend, has loosened the previously consistent expectation of continued Renminbi appreciation. Cross-border capital preference has shifted towards high-elasticity overseas growth, weakening the short-term momentum for Renminbi appreciation and pushing the exchange rate into a period of fluctuation.
The Fundamental Macroeconomic Scenario
Returning to the analysis of domestic macroeconomic data. The latest data for May shows the economy still presents a mixed picture of strength and weakness, with structural divergence remaining a fundamental characteristic of the new cycle.
First, fixed asset investment contracted. From January to May 2026, national fixed asset investment (excluding rural households) fell by 4.1% year-on-year, exceeding the market expectation of a 2.0% decline and widening from the 1.6% drop in the first four months of the year. Fixed asset investment excluding real estate development fell by 1.2% year-on-year, with real estate investment remaining the primary drag. Infrastructure and manufacturing investment saw smaller gains, slowing from 4.3% in January-April to 0.6% in January-May, and from growth of 1.2% to a decline of 0.4%, respectively. By industry, investment in the primary industry slowed (5.9% vs. 10.1%), investment in the secondary industry slowed (0.1% vs. 2.5%), while investment in the tertiary industry declined further (-6.8% vs. -4.2%). Excluding real estate, fixed asset investment in the first five months of 2026 fell by 1.2%, reversing the 1.3% growth seen from January to April. In May, month-on-month fixed asset investment (excluding rural households) fell by 1.91%, a further decline from the 2.36% drop in April.
Second, the property sector remains sluggish. In May 2026, new home prices in 70 Chinese cities fell 3.6% year-on-year, narrowing the decline by 0.1 percentage points from April. This marks the first narrowing of the year-on-year decline this year, but it still represents the 35th consecutive month of decline, highlighting the sector's persistent weakness. Price declines narrowed in major cities like Beijing (-2.1% vs. -2.3% in April), Guangzhou (-3.3% vs. -4.4%), Shenzhen (-4.5% vs. -5.3%), Chongqing (-4.7% vs. -4.8%), and Tianjin (-4.7% vs. -5.1%). Meanwhile, the pace of price increase in Shanghai slowed (3.2% vs. 3.7%).
Third, consumption declined. In May 2026, total retail sales of consumer goods fell 0.6% year-on-year, missing expectations of a flat reading. The Labor Day holiday at the beginning of May failed to offset weak consumer spending, particularly in discretionary and big-ticket items.
Fourth, industrial production continued to diverge. In May 2026, the value-added of industrial enterprises above a designated size grew 4.5% year-on-year, accelerating by 0.4 percentage points from April and exceeding the market expectation of 4.3%. Activity in manufacturing (4.4% vs. 4.0% in April) and in the production and supply of electricity, heat, gas, and water (7.6% vs. 5.3%) accelerated, while growth in the mining sector slowed from 3.8% in April to 2.3% in May.
By sector, 28 out of 41 major industries maintained year-on-year growth, including computer, communication, and other electronic equipment manufacturing (17.0%); railway, shipbuilding, aerospace, and other transportation equipment manufacturing (7.4%); general equipment manufacturing (6.7%); specialized equipment manufacturing (9.1%); electrical machinery and equipment manufacturing (4.7%); raw chemical materials and chemical products manufacturing (0.3%); coal mining and washing (3.5%); agricultural and sideline food processing (1.5%); oil and natural gas extraction (1.5%); textile industry (2.6%); and automobile manufacturing (8.3%). In contrast, the non-metallic mineral products industry fell by 5.6% year-on-year.
Investment Strategy: Returning to the Main Track of Industrial Capital Profit
The analysis above indicates that the current investment strategy should return to the main track, whose core characteristic is the profitability of industrial capital. Profit forecasts can be derived from regularly published company reports or anticipated from macro data releases. Based on the published macroeconomic data, we analyze the areas where industrial capital is profitable.
The current macroeconomy is in the early stage of a profit recovery within a weak recovery cycle, with core characteristics summarized as follows.
First, core drivers. A new round of manufacturing capacity cycle is beginning an upward phase. Investment demand in technology innovation sectors is strong. Optimized export structures are driving growth in high-end manufacturing exports. The ongoing recovery in the Producer Price Index (PPI) is driving profit recovery in upstream industries.
Second, main structural contradictions. Traditional consumer demand recovery is slow. Traditional infrastructure investment momentum is weak. The real estate chain remains in a destocking phase. Significant divergence in prosperity exists between different industries, with a clear characteristic of switching between old and new growth drivers.
Third, macro cycle positioning. The overall economy is at the starting point of an upward capacity cycle and the early stage of a profit cycle recovery. High-end manufacturing and technology innovation sectors are the first to enter an active inventory replenishment phase, showing significantly greater profit elasticity than traditional industries.
Based on macroeconomic data and A-share first-quarter earnings reports available up to June 2026, combined with macroeconomic cycle logic, the most concentrated directions for current industrial profit channels are the Information Technology (TMT) and Materials (especially small non-ferrous metals) sectors, followed by advanced manufacturing and defense within the Industrial sector. The profit drivers are the upward technology capacity cycle and the resonance of recovering PPI prices.
Combined with macroeconomic logic, the current divergence in profitability across industries aligns well with current macro cycle characteristics.
First, the Information Technology sector benefits from the upward phase of a new global technology industry cycle. The accelerated penetration of new technologies like AI and smart technologies, increased investment in digital transformation by domestic enterprises, and continued policy support for tech investment have propelled the sector's capacity cycle into a clear upward phase. Strong order growth places the sector in an active inventory replenishment stage with both strong supply and demand, leading to significantly higher profit growth than other sectors. This perfectly aligns with the classic logic where growth sectors exhibit the greatest profit elasticity during the upward phase of a capacity cycle.
Second, the Materials sector benefits, on one hand, from the ongoing PPI recovery. Rising prices for industrial raw materials directly drive sector profit recovery. PPI recovery typically signals warming industrial demand and increased corporate restocking needs, pulling up raw material prices and profits simultaneously. On the other hand, sustained demand growth for small metals like lithium, cobalt, and rare earths from new energy and high-end manufacturing industries is driving internal structural optimization within the materials sector. High-end material segments are seeing faster profit growth. The resonance between PPI recovery and new demand growth is pushing the sector's overall profit to high growth.
Third, the Industrial sector's overall profit growth is at a moderate level, but internal divergence is significant. Sub-sectors like defense, aerospace, photovoltaic equipment, and general equipment within advanced manufacturing show very high profit growth, pulling up the overall average. Traditional infrastructure-related segments remain in a destocking phase with weaker profit performance, consistent with the macro characteristic of policy support for high-end manufacturing and weak traditional infrastructure momentum.
Fourth, the Consumer sector, including both discretionary and daily consumer goods, shows negative growth, reflecting the still slow recovery of domestic demand. The repair of consumer confidence requires time, aligning with the characteristic of consumption bottoming out in the current weak recovery context.
Fifth, sectors like Financials, Energy, and Real Estate show single-digit profit growth or slight improvement, generally in a stable phase without obvious profit breakout points.
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