The market continued its downward adjustment last week, with the CSI All-Share Index falling by nearly 2% and the ChiNext and STAR indices dropping by more than 4%. The rotation between high and low positions sustained its momentum.
In terms of trading, the crowding pressure has accelerated its digestion. The proportion of stocks accounting for the top 5% of total turnover fell below the one-year average, while the turnover shares of the electronics and communications sectors have retreated to within their thresholds. Margin trading funds primarily flowed out of electronics and communications, yet public funds still hold elevated electronics positions, keeping the overhang pressure from institutional positioning intact.
On the macro front, the 10-year U.S. Treasury yield has reached a one-year high, with the probability of a September rate hike climbing to 57%. A rising U.S. bond yield poses an asymmetric downside risk to A-shares, favoring a relative outperformance of dividend-paying equities. Micro-level data from interim reports confirm an upward trend in earnings growth, with a potential peak expected around the fourth quarter of 2026. However, the growth contribution is concentrated in the TMT and upstream sectors, prompting investors to reduce holdings in some AI hardware that has already priced in strong growth and pivot towards sectors near a bottoming inflection point, such as certain essential consumer goods.
Given this backdrop, our near-term recommendation is to maintain a controlled position, continue rebalancing along the "allocation gap" between earnings and positioning, keep dividend-paying stocks as a core holding, and await further clarity from U.S. CPI data, the FOMC meeting, and new industry catalysts.
Continued pressure from fund managers' crowded positions despite accelerated digestion
Crowding metrics are easing at a faster pace. Last week, the share of turnover in the top 5% of stocks declined by 5 percentage points to 43%, dipping below its one-year average and indicating a notably accelerated unwinding. Structurally, the turnover share of TMT sectors fell from 43% to 41%, with both electronics and communications returning to within one standard deviation of their rolling one-year average. Meanwhile, the media sector's turnover share rose quickly. Outside TMT, crowding increased in agriculture and food & beverage sectors, while it declined in non-ferrous metals and pharmaceuticals, suggesting that the rebalancing proceeds are shifting towards essential consumption.
On positioning, according to estimates from Huatai's quantitative research team as of September 4th, the electronics weighting in actively-managed equity funds remains high, while communications saw renewed accumulation. Concurrently, speculative trading continues to cool, with margin financing witnessing sustained net outflows. The activity level of margin trading has dropped to 8.5%, with electronics and communications being the primary sectors for net selling.
U.S. bond yield risks persist, making dividend stocks a robust core holding
The 10-year U.S. Treasury yield has risen to a one-year high of 4.8%. Following the stronger-than-expected August non-farm payrolls, the probability of a September rate hike has risen to 57%. This week's CPI data serves as another critical variable for rate expectations. Our calculations show that, on a weekly basis since 2022, a 10 basis point increase in the 10-year U.S. yield corresponds to a roughly 0.3 percentage point decline in the CSI All-Share Index return. Since the beginning of 2026, this impact has amplified, with the drop widening to 0.7 percentage points. Furthermore, when yields fall sharply (weekly drops of 15 bp or more), A-shares barely benefit, posting only a 0.1% gain.
Structurally, this round of U.S. yield hikes is driven by energy-related inflation. In terms of style, dividend stocks are outperforming while small-cap specifically underperforms. At the industry level, petrochemicals, coal, and banks are favored, whereas electronics and building materials face pressure. These sensitivities have been amplified this year, with non-ferrous metals turning into a pressured sector. From the perspective of U.S. bond yields, we advise managing exposure to these factors before the CPI release and FOMC meeting, anchoring portfolios with dividend-paying stocks.
Interim reports confirm an upturn in the earnings cycle, driven mainly by TMT and upstream sectors
On an aggregate basis, the 2026 interim reports show that revenue for all A-shares grew 8% year-over-year and net profit attributable to shareholders rose 20%. A majority of companies—63% for revenue and 51% for net profit—achieved positive year-over-year growth. The return on equity (ROE, trailing twelve months) for non-financial companies rebounded from 6% in the first quarter to 7% in the second quarter, marking the first time in 17 quarters that it has risen for two consecutive quarters, primarily driven by improved net margins in upstream sectors. As cost pressures and asset impairment risks gradually emerge, we estimate that the peak of earnings growth might occur near the fourth quarter of 2026.
Structurally, a K-shaped divergence persists, though the number of sectors in recovery is growing. TMT reported a 34% year-over-year increase in trailing twelve-month net profit (led by semiconductors and communication equipment), advanced manufacturing grew 27%, and pro-cyclical sectors turned positive to 9%. Drags come from domestic consumption, infrastructure chains, and traditional export supply chains. From an inventory cycle perspective, TMT sits at a high point of active restocking, while pro-cyclical and domestic consumption sectors are nearing the end of passive destocking. It is notable that since July, investors have been reducing positions in some high-growth TMT stocks with fully-priced valuations, shifting towards high-odds opportunities near bottoming signals.
Continue rebalancing along the "allocation gap" between earnings and positioning
Given still-high public fund positions and upcoming catalysts like the U.S. CPI and September FOMC, we suggest continuing to rebalance based on the "allocation gap":
1) Control exposure sensitive to U.S. bond yields: Before the CPI release and FOMC decision, manage positions in sectors like electronics and non-ferrous metals. Within technology, prioritize segments like communication equipment that are seeing crowding pressure dissipate while still in an active restocking phase.
2) Beyond AI, watch sectors at potential revenue inflection points with attractive valuations, such as the papermaking chain. Also consider certain chemical products—like polyurethane, chemical fibers, and agricultural chemicals—which may benefit from a gradual global restocking cycle after sustained supply-side optimization. Innovative drugs (CXO) remain in an upward prosperity cycle, and any disruption from overseas liquidity expectations could offer opportunities to add positions.
3) Maintain dividend-paying stocks as the core holding.
Risk factors to monitor: external risks exceeding expectations; domestic fundamental recovery falling short of projections.
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