According to analysis from Guojin Securities, the ongoing correction in the A-share market is approaching its latter stages.
The market experienced a significant pullback during the week of July 13-17, 2026, particularly in growth-oriented sectors. Indices such as the ChiNext and small-to-mid cap growth styles fell over 10%, while the large-cap value style recorded a positive return of 2.69%. Market volatility has now surpassed levels seen during the US-Iran conflict in March of this year and is approaching those witnessed during the Sino-US trade friction in April 2025. This pattern of rising volatility during a decline is often a signal that a market adjustment is entering its final phase.
Key Indicators Suggest Limited Downside
Based on observations of margin trading and calculations of potential buffer space in key sectors like electronics and communications, the analysis concludes that if future declines in the TMT sector can be contained within 15%, the market is unlikely to trigger a negative feedback loop akin to a deleveraging spiral. As of last Thursday, the proportion of margin buying to total A-share turnover fell to 8.65%, a yearly low, with the number of investors participating in margin trading also dropping significantly. The margin guarantee ratio stood at 272.65%. While this is still about 20% above the historical low of 220%, considering the over 8% drop in heavily margined sectors like electronics and communications on Friday, the effective ratio is likely much lower. The potential future buffer is estimated to be between 10% and 15%.
Furthermore, comparing the current pullback in AI-related sector indices—now near 30%—to historical maximum drawdowns (30%-55%) seen in cycles like 2007's cyclical stocks and 2021's core assets, the current adjustment appears to be within the range of a typical post-peak retracement for a primary market trend, barring a systemic shock like the 2015 leveraged trading mechanism.
Fundamental Concerns Take Center Stage
As the market falls, current high earnings momentum seems less relevant, with investor focus shifting to long-term narratives for the tech supply chain. Key concerns include: (1) The emergence of negative feedback from AI-driven inflation, where downstream acceptance of price hikes is reaching a limit, as seen in memory chips where future price increase expectations are being revised down and long-term contracts with price caps are being signed. (2) Potential future capacity expansion and new entrants, such as in the optical module industry, which could reshape profit distribution within the AI hardware chain. (3) A style rotation within US markets, where semiconductor and IT indices are underperforming other sectors, reflecting investor caution about the long-term payoff of AI investments despite acknowledging a broader economic recovery.
Similar scenarios played out with cyclical stocks in Q4 2007 and new energy stocks in Q4 2021, where high current earnings did not prevent market anxiety about future inflection points. Back then, leading indicators like the Li Keqiang Index for macro demand had already peaked, or net profit margins in new energy began a sustained decline due to overcapacity.
For the current AI cycle, two variables are crucial to monitor: (1) Whether a turning point appears in the physical consumption of AI resources (e.g., tokens, semiconductor sales). (2) The performance of cloud service providers relative to hardware stocks and the potential for new, non-linear technological breakthroughs.
Three Potential Market Paths
The future market could evolve in three ways: First, if supply chain concerns are disproven and another technological "miracle" occurs, this correction would be merely a deleveraging event, potentially allowing prices to break previous highs. Second, if concerns are validated, a prolonged, fundamentally-driven adjustment phase would follow the leveraged sell-off. Third, and viewed as the most likely scenario, AI investment remains robust with no clear fundamental reversal signal, leading to a market structure reset and a subsequent structural rebound once deleveraging concludes.
Maintaining a Defensive Posture
The core recommendation remains one of active defense. First, with energy prices stabilizing at low levels, sectors benefiting from China's manufacturing activity flow, such as coal and power, offer good absolute return potential, while oil and petrochemicals are due for valuation repair. Second, as AI investment is in the late stage of an overheated cycle, the strategy should focus on controlling position size while increasing portfolio sharpness. Materials and equipment, like semiconductors/AI materials and semiconductor manufacturing equipment, remain key elastic assets and offer defensive qualities in the early "stagflation" phase of a cycle. Third, for sectors like industrial metals, engineering machinery, power grid equipment, and refining, which are in a holding pattern due to high real interest rates affecting emerging markets and Chinese manufacturing, investors could consider gradual, contrarian positioning.
Risks to the outlook include a significant downturn in overseas economies and a complete discrediting of the AI industry narrative.
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