Industrial Securities Co.,Ltd. has released a research report suggesting that the recent extreme rotation in A-shares stems from a highly uncertain macroeconomic environment colliding with a vacuum in industrial narratives. This convergence has left market expectations in disarray, intensifying competition among existing capital while new inflows struggle to align on a unified direction. However, the brokerage argues that extreme rotation is not a sustainable state, and historical patterns suggest the market will likely converge through a recalibration of macroeconomic and industrial outlooks.
Since the July earnings season, typical sectors experiencing upward earnings revisions remain concentrated in broad high-end manufacturing, including AI computing hardware (electronics, communication equipment, computer hardware), AI equipment, AI upstream materials (new materials, glass fiber, small metals, industrial metals), and manufacturing & export chains (innovative drugs, shipbuilding, battery storage, paper). When momentum-based investing returns, these directions are poised to capture greater upside.
What Is Driving the Extreme Rotation
The overwhelming sentiment in the market lately has been one of chaos, rotation, and a lack of a clear theme. The industry rotation intensity indicator developed by Industrial Securities Co.,Ltd. continues to climb, hitting a new year-to-date high this week. Behind this extreme rotation lie several factors. First, an uncertain macroeconomic environment and shrinking risk appetite dominate the landscape. Tensions involving US-Iran issues have fueled oil price surges, while inflation expectations have triggered a cycle of Fed rate hike speculation, repeatedly pushing US Treasury yields higher. Volatility in economic data and internal divisions at the Fed have further amplified uncertainty around monetary policy expectations and contributed to a contraction in global risk appetite.
Second, the market is in a lull between major industrial narratives, with no clear industrial theme emerging. A breakout application or scenario capable of reopening global capital expenditure upgrade expectations has yet to appear, and high-frequency data across supply chains largely indicates either deceleration or decline at elevated levels. Building consensus around the next major industrial theme will require more time. Meanwhile, the market oscillates and rotates, awaiting a fresh narrative comparable to the AI+Coding/Agent theme seen earlier this year.
Third, structural divergence in incremental capital flows and a lack of market cohesion complicate the picture. According to surveys conducted by Industrial Securities Co.,Ltd., funds that have added positions since August fall into two main categories: relative-return public funds and absolute-return insurance capital. These two investor types, with markedly different investment styles, are each acting independently, preventing the market from forming a unified force.
How the Rotation Might Converge: Exploring Key Catalysts
Thus, the recent extreme rotation reflects a volatile macro environment colliding with a narrative vacuum, leaving expectations unsettled and intensifying zero-sum trading among existing capital. Still, Industrial Securities Co.,Ltd. leans toward the view that extreme rotation is not the norm, and the market will likely find resolution through convergence in macro and industrial expectations. Several catalysts could accelerate this process.
First, a reduction in macroeconomic uncertainty. This is the most immediate path to helping the market establish structural consensus. For current markets, especially tech growth assets, the central issue may not be "rate hikes" per se. Historical evidence from the 1999 tech boom, the 2021 new energy rally, and this year's second quarter shows that macro liquidity tightening has limited impact on trends strongly supported by industrial fundamentals. The real constraint lies in risk appetite contraction driven by monetary policy uncertainty. Once policy direction becomes clearer, reduced disagreement and lower uncertainty should help elevate risk appetite. Friday's (September 4) stronger-than-expected nonfarm payrolls and rising rate hike expectations, followed by a rally in US tech stocks, serves as a perfect illustration. Key events affecting Fed decisions are now near, which should help bridge market divisions and lower macro uncertainty, including the September 11 US CPI release and the September 17 FOMC meeting.
Second, the emergence of a new industrial narrative. This is the most fundamental path toward forging consensus around a fresh mainline theme. September through November marks the traditional window for intensive overseas AI catalysts in the second half of the year, with an increasing number of resonance triggers expected. Several important observation windows are worth noting. One is the upcoming ARR data disclosure as Anthropic's listing approaches. Anthropic is likely to go public by the end of October, and as a prospective issuer, it must publicly submit and publish its prospectus at least 15 days before roadshow commencement, which will reveal clearer ARR calculation methods and financial figures. Historical experience shows that strong ARR disclosures by major model developers tend to trigger upward revisions in market expectations for Hyperscaler capital expenditures and AI upstream earnings, while also alleviating recent concerns over ARR and AI ROIC.
Another catalyst is the upcoming earnings season, which will provide clearer guidance for next year's industrial expectations. The next round of overseas tech earnings is set to begin mid-October. Compared with the July-August interim results, this season should offer richer information on forward-looking guidance, giving the market a clearer basis for judgment. Key dates to watch include Oracle on September 10, Micron on September 30, Intel plus the four major cloud providers in late October, and several major optical communication leaders in November.
Third, September through November is also the traditional dense window for annual conferences held by major North American tech giants. These events will showcase the latest products and progress, providing important observation opportunities for new AI applications and scenarios. September features Salesforce, Meta, and OpenAI, while November brings Microsoft and Amazon. Consequently, as macro uncertainty recedes and the weight of industrial and earnings fundamentals rises, the market's recent extreme rotation should unwind. Once confusion and disagreement are resolved through convergence in macro and industrial expectations, consensus around a mainline theme will likely solidify during the process.
After Rotation Converges, Momentum Investing Is Poised for a Comeback
During the recent extreme rotation, the market has responded through three strategies. One is shifting toward a "barbell" allocation of micro-caps plus high-dividend names, using extreme style tilts to navigate sector rotation. The second is seeking "catch-up gains" in previously low-positioned sectors, prioritizing safety based on risk-reward odds. The third involves rapid switching between hot themes and concepts, such as El Ni帽o or AI applications, to capture short-term elasticity for excess returns. The common outcome of these three approaches has been the failure of momentum-based investing. The "high-momentum index," which tracks leading stocks in high-prosperity sectors, has turned negative in year-to-date returns and now trails both high-dividend and micro-cap benchmarks.
As catalysts for rotation convergence approach and the pricing weight of fundamentals increases, the market environment, characterized this year by macro liquidity tightening and earnings as the primary pricing driver, stands to benefit most from the return of momentum investing. Since the July earnings season, typical segments with upward earnings revisions remain concentrated in AI computing hardware (electronics, communication equipment, computer hardware), AI equipment, AI upstream materials (new materials, glass fiber, small metals, industrial metals), and manufacturing & export chains (innovative drugs, shipbuilding, battery storage, paper) within the broad high-end manufacturing space. Once momentum investing reasserts itself, these directions are likely to be the most elastic beneficiaries.
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