The market shifted in August, and the autumn rally has already experienced a rapid rebound. Looking ahead, we maintain a strategic bullish outlook, but tactically, we must be more grounded. Avoid chasing highs to gamble on rebounds; August is more about positioning, seeking new logic amid divergence, and selecting new main lines in the midst of differentiation.
For both Chinese and US stock markets, new market main lines are emerging. The medium-term opportunity worth seizing is the shift of funds from crowded old logic to new fundamental logic. Particularly, the attractiveness of Hong Kong stock allocation has increased, as it has bottomed out ahead of overseas markets. For value investors, this is a time to use market volatility to counter-position, without worrying about short-term missing out, and certainly not to chase highs after a rapid rebound. For relative returns, the goal now is to find uncrowded areas, specifically the direction of "new demand that is empowered by AI and can exceed expectations," rather than simply returning to the overcrowded tech hardware of the first half of the year. Do not cling to the outdated logic of "massive capital expenditure works miracles and AI hardware prices will always rise."
The autumn market will be a broadening of the AI bull market, embracing the new logic of AI-led applications. A structural market will unfold along two new main lines. First, the TMT market will focus on "divergence": 1) moving from thematic investing to performance verification, and 2) shifting the AI industry logic from a focus on AI infrastructure to a focus on AI applications. Second, along the "AI+" main line, expansion will occur towards "non-AI technology" sectors. The hardcore assets in non-AI tech industries will see "old trees bloom new flowers" and undergo value reassessment.
Last week's tech rebound rotated from the previous week's semiconductor leadership to oversold areas like storage. The S&P 500 hit a new all-time high mid-week, and South Korea's KOSPI, ending a seven-week losing streak, surged 11.5% for the week. From a profit and valuation perspective, the S&P 500's rise was primarily driven by upward revisions to forward earnings, with forward valuations largely flat. Earnings and orders continue to validate AI computing demand, with computing rental companies performing strongly. Cloud computing contracts, optical communication demand, and power equipment orders all indicate that short-term AI computing demand remains well-supported.
Market Outlook: The autumn market will transition from a deep rebound to a period of consolidation and divergence. During this consolidation, the new logic and main lines for the second half of the bull market will be established. First, persistently high long-term US Treasury yields will have a negative impact on recently surging global stock markets, especially growth stocks. However, unlike July, the situation is more about opportunity in disguise, being risky but not dangerous. After the volatility, the nature of the autumn market will shift from a deep rebound to a confirmed reversal. The 10-year US Treasury yield has broken through a three-year high and may approach 4.8%-4.9% in the coming weeks, potentially even reaching around 5% in extreme cases. The "gray rhino" of a "summer cold snap" we previously warned about primarily involves the continued rise in long-term US Treasury rates, coupled with geopolitical risks that could trigger a global dollar liquidity shock. The main macro and micro funding shocks from overseas were largely concentrated in July, and the bottom area for the second half of the year has generally been formed.
Since the end of July, global stock markets, especially US stocks, have experienced a rapid and significant rebound. With major US indices either hitting new highs or approaching historical highs, high long-term rates will exert more pronounced pressure on valuations, particularly for growth stocks. It is important to note that real interest rates and term premiums are driving the persistently high long-term US Treasury yields, while below-expectation economic data only suppresses rate hike expectations and short-term rates. Last week, the US July CPI fell from 3.5% to 3.4%, with core CPI dropping to 2.5%. The PPI was flat month-over-month, below expectations. July retail sales fell 0.6% month-over-month, the largest decline in 14 months. The market's expectation for at least one Fed rate hike this year has further dropped to 68%. The 2-year Treasury yield fell 2.40bp to 4.17%, but the 10-year yield rose 4.48bp to 4.69%, widening the 10-2 year spread by 6.9bp for the week. We predict that long-term US Treasury yields will likely rise first and then fall in the second half of the year, leading to a "first down, then up" pattern for global stocks. Short-term focus is on three variables: 1) The US-Iran conflict. 2) Policy signals from the Fed Chair at the Jackson Hole meeting. 3) The impact of joint US-Japan intervention on the yen and whether the Bank of Japan will raise rates earlier. Market expectations for a September BOJ rate hike have notably warmed, with the probability approaching 80%, and a potential acceleration of rate hikes later cannot be ruled out. This could help narrow the US-Japan interest rate differential and ease yen depreciation pressure. However, the combination of "rising Japanese bond yields + potential yen appreciation" may put some pressure on Japanese stocks, especially export and high-valuation growth stocks. It could also trigger a round of concentrated unwinding of carry trades, amplifying risk asset volatility through the reduction of global leveraged funds.
Second, whether the autumn market can truly transition from a deep rebound to a second-half bull market depends on confirming new fundamental logic and main lines. The rebound in global stock markets since late July has not yet confirmed new logic or main lines. The hotspots are scattered and rotating quickly, making the market more akin to a technical repair after the severe sell-off in the first half, especially in July. After the extreme crowded trading and fully priced-in expectations of Q2, if the bull market represented by AI tech is to continue, the AI industry chain needs to establish new, sustainable growth logic, and the market needs new investment main lines. We believe this will likely be a new phase of the tech bull market adapting to the next step of the AI industry wave, meaning the AI tech wave has started its second half. AI applications will scale and spread, and "AI+" will empower a multitude of industries. The new logic for the second half of the AI bull market will shift from hardware-led to application-led. Market opportunities will broaden, unlike the extreme narrowing of the first half to "optics" and "storage." The new phase of the autumn market will transition from the August deep rebound to seeking new main lines for the second half of the AI bull market, nurturing new dominant industries or sectors.
First, the AI-driven technology cycle is moving into its second half. The industry's focus will shift from infrastructure construction to applications. Infrastructure solves the "whether it exists" problem, while application diffusion determines "whether it can truly generate revenue and profit." If AI applications fail to form sustainable commercial value, this market cycle may ultimately be seen as a valuation bubble. However, if AI represents a new information technology revolution, then a super-expectation diffusion of applications will surely occur, pulling demand for computing power and infrastructure, and creating a virtuous cycle. Some positive signals are already appearing. Coding scenarios have been the first to validate AI's impact on efficiency improvement and willingness to pay, indicating that the path for AI to transform from technical capability to practical productivity is gradually being paved. Simultaneously, as China's open-source large model capabilities improve and usage costs decline, the barrier to entry for Agents and various AI tools could further lower, creating conditions for AI to spread across industries.
Second, we estimate that over the next year to year and a half, the AI bull market will also enter an "AI+" new phase. The market main line will gradually shift from hardware-led to AI application and AI+ empowering all industries. The expansion of AI application demand will, in turn, pull demand for AI infrastructure and hardware, forming a virtuous cycle of a broadening bull market. The second half of the AI bull market does not mean the end of the AI hardware story. However, the hardware sector will transition from broad-based gains to clear differentiation. Truly competitive leaders with technological barriers, order fulfillment, and sustainable profitability, after undergoing valuation digestion, can still resume their rise and even hit new highs. But for the majority of thematic stocks, mapping plays, and pure concept targets lacking fundamental support, their AI bull market may already be over.
Investment Strategy: Position for the autumn market by embracing one new logic and two major investment avenues. The market shifted in August, and the autumn rally has experienced a rapid rebound. Strategically, we remain bullish, but tactically, we must be grounded. Avoid chasing highs to gamble on rebounds. August is more about positioning, seeking new logic amid divergence, and selecting new main lines amid differentiation. For both Chinese and US markets, new main lines are gestating. The medium-term opportunity worth seizing is the shift of funds from crowded old logic to new fundamental logic. The appeal of Hong Kong stock allocation is increasing, as it has bottomed out ahead of overseas markets. Value investors can use market volatility to counter-position without worrying about short-term missing out, and certainly should not chase highs after a rapid rebound. For relative returns, the goal is to find uncrowded areas, specifically the direction of "new demand empowered by AI that can beat expectations," rather than simply returning to the overcrowded tech hardware of the first half. Do not rigidly adhere to the old logic of "massive capital expenditure works miracles and AI hardware prices will always rise." The autumn market will be a broadening of the AI bull market, embracing the new logic of AI-led applications. A structural market will unfold along two new main lines.
First, the TMT market focuses on "divergence": 1) moving from thematic investing to performance verification, and 2) shifting the AI industry logic from a focus on AI infrastructure to a focus on AI applications. In the second half, as applications gradually land, the AI market will shift from universal gains to differentiation. Initially, funds will concentrate towards truly competitive AI hardware leaders. Thematic stocks and mapping plays in the AI hardware field will be discarded by the market. Focus on the sustainability of high revenue growth, the irreplaceability of R&D capabilities, and the growth potential in areas addressing weaknesses. Second, explore AI To B scenarios, including computer leaders in government AI, enterprise digitalization, military AI, medical AI, and financial AI. Also, focus on AI+ consumer and entertainment-related sectors like consumer electronics, media, and robotics. Global fund flows are gradually shifting from the previously highly crowded tech hardware towards AI applications.
Second, along the "AI+" main line, expand towards "non-AI technology" sectors. The hardcore assets in non-AI tech industries will see "old trees bloom new flowers" and undergo value reassessment. It is crucial to emphasize that this round of expansion is not the traditional value reassessment of "old economy" assets driven by macro policy stimulus or massive liquidity injections. Instead, it is more centered on new quality productive forces and AI technology empowerment. In the future, excellent companies in "non-AI tech" fields can also achieve "old trees bloom new flowers" through AI transformation, efficiency improvement, and industrial upgrading. They will become assets that combine a value safety margin with growth elasticity. As AI applications continue to spread, the scope of direct or indirect beneficiaries will extend to industries like pharmaceuticals, especially innovative drugs, non-ferrous metals (gold, copper), brokerages, and the overseas expansion chain (power equipment, machinery, chemical new materials). Over a longer-term horizon, the investment framework for the Chinese stock market can be summarized as "recognize the big trends, follow the policy, and understand value." First, grasp the two long-term trends of global order restructuring and the AI tech revolution. Second, around "15th Five-Year Plan" directions, new quality productive forces, and "AI+" and other industrial policies, seek areas where resources are persistently concentrated. Ultimately, return to value itself, judging a company's long-term earnings growth, cash flow generation ability, and the sustainability of future growth. What is truly worth positioning in now are directions with low congestion, the ability to benefit from AI empowerment, and ultimately realize growth in revenue and profits.
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