A review of our market outlook reveals that we were the first in the industry to issue a "Summer Cold Wind" warning on May 6, followed by a series of reports cautioning about significant correction risks in global equities during June and July. After maintaining a bearish stance in July, we shifted to a positive outlook in our August 2 weekly report, "Summer Cold Wind Nears Its End, Autumn Rally Begins to Emerge."
Looking ahead, the autumn market is shaping up to be a period that, while not resembling spring, offers even greater promise. The bull market is entering its second half, where old logic is dismantling and new logic is establishing itself. The bottom zone for the second half of the year is largely in place, with the major impacts from financial "gray rhinos" and "black swans" having been largely released in July. The "gray rhino" risks we previously highlighted were primarily the sustained rise in long-term U.S. Treasury yields, compounded by geopolitical risks that could trigger a global dollar liquidity shock. The "black swan" risk was the reflexivity of extremely crowded trades and leveraged positions, as seen in the South Korean stock market. These risks have now been largely absorbed, and while there may still be residual disturbances, unlike July, the cross-market contagion risk has significantly diminished. The situation appears hazardous but presents opportunities, and any surprises are manageable. If U.S. bond yields surge beyond expectations in August, the momentum for this autumn's rally could be even stronger.
What truly defines the character of the autumn rally is whether a new fundamental logic can be established after the "Summer Cold Wind" correction. In a less likely scenario, if the subsequent rebound is driven solely by short-covering, heightened expectations of a U.S. interest rate cut, or increased Chinese stimulus, it would resemble a large-scale bear market rebound. In a more probable scenario, the AI-driven tech bull market will continue, but it will require new fundamental logic and new investment opportunities. We believe the AI tech wave is entering its second half, with AI applications and "AI+" set to empower various industries, shifting the focus from hardware to applications. If a sustainable growth logic for the AI industry chain can be established in the second half, the autumn rally will be about finding new main themes and leading sectors. The AI-driven Juglar cycle is moving into its later stages, where the industrial focus shifts from building infrastructure to application deployment. Infrastructure solves the "whether it exists" question, while application diffusion determines revenue and profit generation. If AI applications fail to create sustained commercial value, the current rally may ultimately be a valuation bubble. Conversely, if AI represents a genuine information technology revolution, a super-diffusion of applications will emerge, driving real demand that pulls along computing power and infrastructure, creating a virtuous cycle. Positive signals are already appearing, with scenarios like coding demonstrating AI's ability to boost efficiency and willingness to pay, signaling a path from technical capability to real productivity. As China's open-source models improve and costs decline, barriers to widespread adoption of agents and AI tools are lowering, accelerating AI diffusion across industries.
We expect that over the next year to eighteen months, as the AI industry enters its "second half," the bull market's main theme will shift from hardware to AI applications and AI+ across industries. This shift will, in turn, drive demand for AI infrastructure and hardware. While the hardware sector won't be totally abandoned, it will see significant divergence. Leaders with genuine technical barriers, order pipelines, and sustainable profitability may recover and hit new highs after valuation digestion, but many thematic and speculative stocks without fundamental support will see their bull market end. The new logic emphasizes less crowded spaces, such as areas where AI enables new demand that can exceed expectations, rather than reverting to the crowded tech hardware of the first half. The first half was driven by infrastructure capital expenditure, computing demand, and hardware price increases. The second half will focus on application deployment, commercialization revenue, and earnings delivery. Recent rebounds in AI software stocks, especially those with accelerating revenue, improved guidance, and expanding key clients, highlight the potential for commercially viable applications to become key themes in the autumn rally.
Investment strategy involves shifting from defending against the "Summer Cold Wind" correction to positioning for the autumn rally. Strategically, one can gradually turn bullish, but tactically, avoid chasing rebounds and instead seek new logic amidst divergence, selecting new themes. For both Chinese and U.S. equities, new main themes are emerging, so August is more about positioning than harvesting. The key opportunity is capital rotating from crowded old logic to new fundamental logic. Hong Kong's equity market, which has bottomed before overseas markets, offers enhanced appeal for value investors. They can use market volatility to build positions without worrying about short-term rallies or chasing after rapid rebounds. The autumn rally will be a diffusion of the AI bull market, embracing a new logic centered on applications, unfolding along two main themes. First, the TMT sector will focus on "divergence," moving from thematic investing to earnings validation, and shifting from AI infrastructure to applications. Capital will concentrate on AI hardware leaders with genuine competitiveness, while thematic and speculative stocks will be abandoned. Priority should be on AI hardware leaders with sustained high revenue growth, irreplaceable R&D capabilities, and growth in areas addressing weaknesses. Second, focus on AI To B scenarios, including government AI, enterprise digitalization, military AI, healthcare AI, and financial AI, as well as AI+ consumer entertainment sectors like consumer electronics, media, and robotics. Global capital flows are gradually shifting from crowded tech hardware to AI applications.
The second theme involves the "AI+" diffusion into non-AI tech sectors, where hard-core assets in these industries can experience "old trees bearing new flowers" and revaluation. This diffusion is not driven by traditional macro stimulus or excessive liquidity, but by new productivity and AI tech empowerment. Outstanding companies in non-AI tech sectors can, through AI transformation, efficiency gains, and industrial upgrades, achieve "old trees bearing new flowers," becoming assets with both value safety margins and growth elasticity. As AI applications spread, the scope of AI empowerment will extend to pharmaceuticals, especially innovative drugs, non-ferrous metals, brokerages, and export-oriented chains (power equipment, machinery, new chemical materials). In the long term, China's equity investment framework can be summarized as "understanding the macro trend, aligning with policy, and recognizing value." First, grasp the two major long-term trends: global order restructuring and the AI tech revolution. Second, focus on areas with sustained resource concentration, such as the "15th Five-Year Plan," new productive forces, and "AI+." Ultimately, return to value itself, assessing long-term earnings growth, cash flow generation, and growth sustainability. The truly worthwhile positions for now are in less crowded areas that can benefit from AI empowerment and ultimately deliver revenue and profit growth. Detailed logic, analysis, and risk disclosures are available in the full report, which institutional clients can obtain from their sales representatives at Guotai Haitong/Haitong International.
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