To The Moon

On October 8, the first trading day following the National Day holiday, A-shares failed to open with gains. The market rallied then retreated, with technology sectors weakening while cyclical and dividend sectors provided support. Daily market turnover expanded to 1.69 trillion yuan.

Looking at the full-year market trajectory, A-shares experienced an oscillating upward trend in the first half, a corrective pullback in the third quarter. How will the fourth quarter unfold, and how should investors position their holdings and allocations?

Interviewees indicated that A-shares are expected to maintain an overall consolidating and resting pattern in Q4. The market needs to focus on technology industry developments, international oil price fluctuations, the Federal Reserve's October and November FOMC meetings, and geopolitical variables such as the U.S. midterm elections.

Regarding sector allocation, three main lines can be pursued: first, the technology track, seizing opportunities based on industry trends; second, cyclical sectors, betting on the realization of rate hike expectations; third, domestic demand directions, waiting for policy implementation catalysts. If all three main lines underperform expectations, capital will likely flow back to dividend assets for safe haven.

Technology's Rise and Fall

In the first half of the year, A-shares delivered a "feast." In terms of indices, the Shanghai Composite rose 7.55% during the period. Technology stocks led gains by a wide margin, with the dual-innovation indices repeatedly hitting new highs. The ChiNext Index surged nearly 36%, and the STAR 50 jumped over 64%.

In July, A-shares suddenly plunged, followed by oscillating fluctuations in August and September, and renewed weakness in late September. Throughout the third quarter, the Shanghai Composite fell over 6% cumulatively, the ChiNext Index dropped nearly 28%, and the STAR 50 declined nearly 31%.

In terms of sector performance, technology stocks represented by telecommunications and electronics experienced "massive rallies and crashes." In the first half, capital was highly concentrated in the technology track, with electronics (SW) rising over 86% cumulatively and telecommunications (SW) gaining nearly 74%. But since July, violent fluctuations occurred, with only slight rebounds in August and September. In the third quarter, electronics (SW) and telecommunications (SW) fell approximately 33% and 29% respectively.

Xing Yicai, Research Director at Zirui Xing Investment, analyzed that the oscillating adjustment since July was essentially a dual clearing of "crowded trade deleveraging plus external valuation suppression," rather than a deterioration in fundamentals.

Specifically: first, at the trading level, the extremely crowded technology sector in the first half collapsed in July, with electronics falling 34.72% in a single month, telecommunications dropping 31.9%, and the STAR 50 plunging 25.9% in a single month—a historical rarity—with A-share market capitalization evaporating by over 12 trillion yuan at one point. Second, at the external level, the 10-year U.S. Treasury yield briefly breached 4.75%, the 30-year reached 5.26%, and high long-end rates suppressed valuations of long-duration growth assets, compounded by the Fed's September rate hike and geopolitical and oil price disruptions. Third, at the capital level, leveraged funds retreated from a peak of 3.03 trillion yuan and had not yet significantly returned, while holiday risk aversion and the earnings vacuum before Q3 reports left existing stock games lacking an offensive main line.

Jia Xiaolong, Director of the Black Isle Capital Research Institute, believes this round of adjustment is a resonance of "external interest rate shocks" and "internal high-low switching"—a deep breath during a bull market, not a trend reversal.

First, from the market perspective, the main decliners since July were high-position growth sectors that had risen significantly earlier, such as AI computing power, semiconductors, and CPO (co-packaged optics), while low-valuation dividend assets like banks, power, and coal gained inflows against the trend. This is not a bear market rout, but an orderly migration of capital from "high" to "low."

Second, from the overseas perspective, on September 16, the Fed raised rates by 25 basis points for the first time in three years to 3.75%-4%, and the 10-year U.S. Treasury yield approached 4.96%, pressuring global risk asset valuations—this was the primary external cause of this adjustment.

Third, domestically, the policy backdrop remains warm: the moderately accommodative monetary policy and more proactive fiscal policy tones remain unchanged, the yuan appreciated over 4% year-to-date, and bank settlement and sales surpluses reached $337.9 billion in the first eight months, indicating "smart money" is voting with its feet.

After the sharp drop in July, technology stocks rebounded but market sentiment remained volatile, seemingly departing from the relatively stable operating environment of the first half.

Li Changfeng, Market Strategist at AllianceBernstein, analyzed that the pullback mainly revolves around market concerns about the sustainability of AI capital expenditure—some cloud service giants showed signs of weakening cash flow in their most recent quarterly earnings, and the market began questioning whether major players can maintain high-intensity investment.

On the other hand, AI hardware suppliers delivered completely different results: strong earnings growth, with companies generally stating that demand shows no end in sight and the real bottleneck is production capacity.

"AI capital expenditure is expected to continue growing in 2026 and 2027, with relatively high visibility. However, due to the already high base, the growth slope may gradually slow in future quarters, with particular attention needed on challenges such as U.S. policy risks and power supply bottlenecks," Li Changfeng stated.

Market Bottoming in Search of Opportunities

Since late September, A-shares have weakened on shrinking volume, frequently showing "low volume, low price" characteristics, with trading becoming cautious and combined turnover once falling to around 1.42 trillion yuan.

On October 8, the first trading day after the National Day holiday, the market rallied then retreated, further suppressing market confidence. The much-watched question follows: Has A-shares bottomed out? And which signals should be closely monitored?

Jia Xiaolong suggests tracking three bottoming "scales": first, volume—whether turnover can gently expand again after shrinking to the extreme; second, policy—whether the stable growth policy package can move from "expectation" to "implementation"; third, structure—whether strong stocks have completed their catch-down and whether new main lines are emerging.

He emphasized that the bottom is not a point but a zone. "Most signals are currently improving, pointing to 'bottoming' rather than 'collapse.'"

Xing Yicai believes five signals need attention for an A-share bottom: first, volume—whether turnover can stabilize and rebound after shrinking about 50% from the July peak, with initial signs of stabilization already appearing; second, valuation—CSI 300 PE (TTM) at 13.34x, at approximately the 64th percentile over the past decade, with the Shanghai Composite near 3,800 points approaching the lower bound of the past year's oscillation range, indicating improved safety margins; third, earnings—interim reports show non-financial sector earnings have shown an upward inflection, with companies achieving net profit growth exceeding 50% accounting for 23.19%, a high level in the past three periods; fourth, capital—social security, annuity, and insurance funds have net purchased over 600 billion yuan year-to-date, with long-term capital continuously providing support; fifth, external—the pace of decline in U.S. Treasury yields and oil prices, and the landing of the late-October FOMC meeting.

CICC reminds that four types of events need close attention in Q4: first, technology developments, especially Anthropic's potential IPO plan and its Q3 earnings; second, oil price changes and the Fed's October and November FOMC meetings; third, fiscal policy, especially the year-end Central Economic Work Conference; fourth, geopolitical factors such as the U.S. midterm elections.

Regarding the overall Q4 A-share outlook, Jia Xiaolong summarized it as "oscillating bottoming, structure is king," and believes the year-end "valuation switch" rally is worth anticipating.

On one hand, from a policy perspective, Q4 is the window for laying out the "15th Five-Year Plan," with industrial policies related to self-reliance and new quality productive forces expected to see intensive catalysts. The policy bottom has long been consolidated, while the market bottom is still being polished.

On the other hand, from the overseas perspective, risks must be clearly flagged—U.S. inflation stickiness persists, the dot plot suggests possibly one more rate hike this year, and if U.S. Treasury yields remain elevated, high-valuation sectors will still face volatility. This is the biggest uncertainty in Q4, requiring prudence.

"Focus on several major external risk factors: elevated U.S. Treasury yields, oil prices and geopolitics, and the late-October FOMC," Xing Yicai stated. He expects Q4 A-shares to show a pattern of oscillating upward movement, structural differentiation, and style rebalancing, with no systemic downside risk, but conditions for a full bull market are not yet in place.

His reasoning is threefold: first, calendar effects—historical reviews show that pre-holiday volume contraction adjustments and post-holiday capital returns mean Q4 is often a window for valuation repair and spring rally preparation; second, fundamentals—Q3 reports enter the verification period, with prosperity clues such as AI hardware, memory price increases, and PPI (Producer Price Index) turning positive expected to move from expectation to realization; third, liquidity—domestic fiscal and monetary policies still have counter-cyclical adjustment space, with medium-to-long-term capital continuing to enter the market.

"In the short term, the market remains highly sensitive to oil prices, U.S. Treasury yields, and Fed rate hike expectations. In the medium term, technology and non-technology sectors are temporarily unable to independently support large directional moves, and we should calmly face a stage lacking a breakthrough direction. The tone for the remainder of 2026 leans toward oscillating consolidation," said Fu Jingtao, Chief A-share Investment Strategist at Shenwan Hongyuan Research Institute.

He noted three event windows worth watching in Q4: first, Q4 2026 to H1 2027 is a critical window in the global political cycle; second, Q4 is a period of domestic policy planning—the Fifth Plenum and Central Economic Work Conference will be held successively, with attention on incremental real estate policy layouts across regions; third, regarding technology industry catalysts, A-share Q3 earnings will preliminarily digest valuations, and the overseas AI industry chain will see Q4 earnings verification.

"Short-term market style switching may still be rapid, with post-holiday focus on the repair of trading activity, Q3 earnings realization, and the pace of policy implementation," Zhang Pengyuan, Researcher at PaiPaiWang Wealth, told reporters. The pre-holiday A-share adjustment mainly stemmed from intensified volatility in previously strong sectors, compounded by a phased decline in risk appetite as the long holiday approached. However, marginal improvement in domestic economic prosperity and continued stable growth policy efforts mean the medium-term support logic for the market has not disappeared.

Zhang Di, CEO of Hong Kong Shenghsi Yuxiang, told reporters that dollar trends are highly sensitive to changes in the Middle East situation. Oil price increases often drive the dollar stronger, and investors are gradually treating oil prices as a proxy for global risk sentiment: energy price increases raise monetary tightening expectations, push up U.S. Treasury yields, and thereby support the dollar. Currently, energy prices are oscillating at high levels, with geopolitical tensions continuously triggering market concerns about supply disruptions. Although oil prices have retreated from the March-April 2026 highs, uncertainty in the geopolitical outlook continues to embed risk premiums in energy markets, and energy prices will likely continue to be driven by the Middle East situation.

Balanced and Diversified Allocation

AI and other technology stocks have experienced massive swings, with high crowding accompanied by violent fluctuations; the consumer sector has been persistently declining for nearly two years, occasionally seeing rotational rebounds but lacking fundamental realization, with weak upward momentum.

In Zhang Pengyuan's view, entering Q4, as Q3 reports enter the intensive disclosure window, the market focus may shift from valuation expansion to earnings verification. Technology growth, consumer, pharmaceutical, and low-valuation sectors may engage in rotational moves centered on fundamentals and policy catalysts.

At the sector allocation level, Jia Xiaolong recommends a "barbell" strategy: one end as a defensive anchor, allocating to dividend assets such as banks, power, and utilities, benefiting from the low interest rate environment and the deposit migration brought by "asset scarcity"; the other end for offensive main lines, seizing technology self-reliance directions such as artificial intelligence, semiconductors, and domestic software, where sector pullbacks squeeze out bubbles and bring better allocation windows; in the middle dimension, attention can be paid to resource products benefiting from the restructuring of the global energy landscape, as well as consumer recovery directions with marginal earnings improvement.

From the micro earnings perspective, listed companies' Q3 reports will test the quality of industry prosperity, and earnings certainty may become the core anchor for navigating market volatility.

Xing Yicai favors a "non-ferrous metals plus technology" dual main line. The non-ferrous metals sector has strong certainty: global central banks continue purchasing gold, de-dollarization progresses, combined with rigid mining supply, AI computing power and energy transition driving demand upgrades. The medium-to-long-term logic for gold, copper, rare earths, and aluminum is extremely difficult to disprove. In the first half, the non-ferrous metals sector saw revenue grow 33% year-on-year and net profit attributable to parent surge 110%, ranking among the top in the entire market for earnings realization, possessing both anti-inflation and safe-haven attributes.

Technology is the source of market elasticity. After pullbacks, sectors such as AI computing power, semiconductor equipment and materials, optical communications, PCB, and advanced packaging have seen valuations digested and trading crowding reduced. Focus can be placed on hardcore niche segments with order and earnings realization capabilities.

From an investment strategy perspective, Li Changfeng pointed out that the recent rapid market style switching once again confirms that precisely predicting style rotation timing is extremely difficult, and investors should not heavily bet on a single hot theme or track. Current market volatility has rebounded from lows, with geopolitical conflicts, AI industry divergence, and uncertainty over the Fed's policy path continuously suppressing market sentiment. Maintaining style neutrality and digging for individual stock opportunities from the bottom up may be a prudent choice for obtaining stable excess returns in the current environment.

Looking ahead to Q4 allocation thinking, CICC states that sectors can be divided into four categories based on driving logic: technology sectors await industry trend catalysts, cyclical sectors bet on Fed rate hike expectation realization, and domestic demand sectors depend on policy implementation; if all above main lines underperform, capital may return to dividend strategies, returning to a market pattern similar to before "9/24" in 2024.

For the technology sector, downside risks have been somewhat alleviated, but upside space still awaits catalysts; without new model breakthroughs or earnings realization, valuations will find it difficult to break through previous highs. Certainty varies across different segments within technology: models are the most fundamental link, but it is difficult to determine company-level "winners." Applications are important, with imagination space mainly in the to-C domain, but who can succeed and how to trade remain uncertain. Short-term certainty lies in hardware, especially bottleneck segments. This round of hardware earnings cycle may have reached the mid-to-late stage, with around Q2 2027 being a key window for fundamental verification.

Fu Jingtao believes the current stock selection logic for the AI industry chain remains unchanged: first, focus on directions where fundamental expectations can break through end-June levels, such as CPO, computing power inflation catalyzed by GPT6, and PCB industry chain price increases; second, screen tracks where 2027 prosperity continues to improve relative to 2026. After Q3 reports land in late October and earnings digest valuations, differentiated moves are expected, with focus on memory, high-end CCL (Copper Clad Laminate), PCB, and capacitors; third, value thematic investments in both technology and non-technology. The current market environment resembles H1 2014—short-term adjustment, medium-term oscillating consolidation, with market waves somewhat elongated, requiring a broader vision that encompasses both technology and non-technology themes. The continued evolution of technology themes is a process of brewing new main lines. Against the backdrop of short-term market headwinds, the market's exploration of AI industry progress remains insufficient, reserving space for thematic rotation in the subsequent rebound phase.