Shenwan Hongyuan Group Co.,Ltd. has released a research report indicating that while a September rebound is likely, rebuilding a major market trend will require additional time. Global equities remain sensitive to U.S. Treasury-related disruptions, with the medium-term issues behind high U.S. bond yields still acting as a drag on global markets. The primary focus for tech stock pricing has shifted back to the alignment between industry fundamentals and valuations, and the "computing power inflation" trade is set to diverge in the coming phases. Sectors with projected 2027 earnings growth exceeding 2026 levels may strengthen with differentiation starting in Q4 2026.
The firm maintains its view that the September rebound will continue. The key to structural selection is identifying oversold sectors with the greatest potential to recoup losses. Within the AI supply chain, attention should shift toward non-institutionally held names, with domestic computing power chains and AI small-caps offering short-term support from mid-term themes. For the medium term, focus areas include memory, high-end CCL, PCB, and capacitors鈥攁ll key segments of the computing power inflation theme.
Global Markets Remain Sensitive to U.S. Treasury Disruptions: Medium-Term Issues Behind High Yields Persist
The report highlights four structural problems: weak U.S. fiscal discipline with rising short-term debt and interest payment shares; central bank reserve diversification eroding demand in U.S. Treasury rollovers; increased AI-related debt financing diverting global capital; and vulnerabilities in Japan's economy and yen carry trades, which can trigger Treasury selling under current intervention frameworks. U.S. policy currently leans toward short-term fixes rather than long-term solutions. The Treasury-led "operation twist" lacks a sustainable logic under weak fiscal discipline, while the Fed's monetary policy framework in the AI era remains experimental. One Federal Reserve governor's more traditional stance has even introduced short-term rate hike risks. Consequently, global equities will stay sensitive to Treasury-related shocks, with frequent disruptions likely to persist absent medium-term mechanisms.
Tech Sector Shifts Focus from Micro-Structure to Fundamentals and Valuation Alignment
In the near term, capital supply-demand dynamics and market volatility are declining in tandem. The excessive rally in the AI chain driven by a positive capital loop in Q2 2026 has been partially digested. The main contradiction in tech pricing has returned to the match between industrial logic and valuation. The computing power inflation trade will inevitably differentiate. Once static valuations are digested by earnings鈥攆ollowing the communications sector's Q3 2026 report and electronics' FY26 annual report鈥攕egments with higher 2027 earnings growth than 2026 may begin differentiated rallies in Q4 2026.
Addressing micro-structure concerns, the report argues that expecting a significant near-term decline in public fund allocation coefficients is unrealistic. Based on 162 heavily held tech track stocks, Q2 2026 data shows these names account for 3% of total A-share revenue, 4% of profits, and 16% of market cap, yet 54% of equity fund allocations. While 54% appears extreme, the composition shows a sharp rise in net margins during Q2 2026鈥攕upporting the industrial foundation. Static PE valuations are at historical extremes, with electronics rising 91% in Q2 2026, ranking fourth among all sectors historically. The rapid price appreciation driven by the capital loop is being corrected now, and allocation coefficients actually declined marginally in Q2. Historically, fund coefficient reductions follow fundamental weakness or deteriorating allocation environments. Thus, expecting rapid near-term reductions is unrealistic. Recent downward pressure on coefficients stems mainly from non-track fund managers rotating to other opportunities for alpha.
During the May-June rally, public track funds were marginal buyers, with incremental inflows around 210 billion yuan against existing scale of roughly 790 billion yuan. Pricing power relied heavily on concentrated holdings and high redemption turnover. However, during corrections, track fund positions show resilience, while non-track fund adjustments, sell-offs, and redemptions have limited impact. Recent flows around breakeven levels for electronics and communications show narrow fluctuations, with declining volatility and volumes reflecting reduced capital supply-demand swings. The negative loop impact from July-August has diminished, returning tech pricing to fundamentals versus valuation alignment.
Going forward, differentiation in computing power inflation is highly probable. AI capex growth may decline sequentially from 2027-2028, with further pressure within 2026. On the alpha side, most segments see broad improvements in 2026, but 2027 fundamentals could diverge significantly as supply-demand tensions ease and price hikes moderate. By 2028, most computing power chain segments may see earnings growth decelerate. Before end-June 2026, linear extrapolations of long-term trends faced little resistance, but markets now struggle to support high valuations solely on post-2028 outlooks. Still, after earnings digest valuations, segments with improving 2027 vs 2026 fundamentals should resume uptrends. The first target for valuation digestion is a return to historical median static PE. Without further adjustments, communications after Q3 2026 reports and electronics after FY26 annual reports should see static valuations revert to medians, making Q4 2026 a potential starting point for differentiated strength in the computing power chain.
A-Share Q2 Results Point to a Choppy Earnings Path Ahead
From Q3 2026, aggregated net profit growth for all A-shares ex-financials and ex-Petrochemical ("two non") will step down and fluctuate repeatedly, making cyclical improvement hard to establish as consensus. Cost pressures may surface in financial statements during Q3 2026. Q2 impairments exceeded seasonal norms, and Q4 2026 impairments may also run high. In Q2 2027, low PPI growth on a high base will pressure revenue growth and pull profit growth down.
A-share Q2 report key concerns include: (1) supply-side rationalization is on track, but weak demand keeps revenue growth below expectations; (2) high non-recurring items influence earnings, with investment gains and fair value changes positive, but FX losses and asset write-downs negative; (3) cost pressures are not fully reflected in statements. The extra earnings improvement, driven mainly by cost-side factors, exceeds historically reasonable confidence intervals, reflecting product prices adjusting to markets while cost accounting uses a FIFO basis. Many industries achieved product price hikes and real pass-throughs, with Q2 2026 understated costs delivering additional gains. However, Q3 2026 will begin fully absorbing higher costs, compounded by sequential PPI gains, leading to additional profit growth deceleration. From Q3 2026, the "two non" aggregate net profit growth steps down with choppy swings. Cost pressure could concentrate in Q3 statements, pulling profit growth down significantly. After Q2 impairments ran above seasonal, Q4 2026 may see similarly elevated write-downs. In Q1 2027, high-cost impacts fade, driving a profit rebound toward medium-term trends, but Q2 2027's high PPI base pressures revenue and profits. This validation path suggests limited room for pro-cyclical optimism to build momentum.
Maintain September Rebound View: Focus on Oversold Names with Maximum Recoupment Potential
Maintain the September rebound call, with structural selections emphasizing oversold names capable of recovering the most ground. Within the AI chain, prioritize non-institutionally held names, with domestic computing power and AI small-caps providing short-term support from medium-term tailwinds. For the medium term, focus on computing power inflation segments with accelerating 2027 earnings growth, especially memory, high-end CCL, PCB, and capacitors. After September, tech will continue its consolidation and correction band. Non-tech sectors will outperform for extended periods, while high-dividend assets gain absolute return longevity. In non-tech tracks, CXO and innovative drugs have demonstrated their ability to sustain positive capital loops. Precious metals may face short-term volatility, but medium-term pricing of weaker U.S. dollar credit leaves room for gains. Also watch industrial metals and basic chemicals. Continue using the "CSI 800 index weights minus Q2 2026 public fund holdings" framework to identify high-dividend assets, focusing on banks, non-bank financials, food & beverages, and utilities. Holding high-dividend assets remains prudent while monitoring upcoming key verification windows.
Risks: Greater-than-expected overseas economic recession; weaker-than-expected domestic economic recovery.