A-share markets experienced a notable correction, with the Shanghai Composite Index turning negative for the year once again. On August 19, Asia-Pacific markets broadly declined due to overseas headwinds, with South Korea suffering significant losses and A-shares also seeing a sharp pullback. The Shanghai Composite fell 2.4% in a single session, pushing its year-to-date return back into negative territory. Large-cap blue-chip indices such as the Shanghai 50 and CSI 300 dropped 1.5% and 2.9% respectively, while growth and small-cap styles suffered even steeper declines—the ChiNext Index and STAR 50 tumbled 6.3% and 6.9%, while the CSI 1000 and CSI 2000 slid 5.4% and 5.6%. At the sector level, most industries declined, with only defensive sectors like banking, oil & petrochemicals, and coal posting modest gains. Technology-related growth sectors underperformed, with electronics, communications, and machinery leading the losses.

The market correction was primarily triggered by a confluence of external negative factors. First, negative narratives around overseas AI intensified. Reports indicate that as of end-July, Anthropic's annualized revenue run rate (ARR) surpassed $65 billion, representing more than a sevenfold increase from end-2025, yet this figure trails third-party tracking estimates, and monthly growth momentum has shown signs of deceleration—the slowdown in second derivatives fueling investor concerns. Additionally, to support U.S. AI data center construction and computing capacity expansion, U.S. investment-grade bond issuance has continued to grow, reaching $145.2 billion in August as of August 17, sustaining a rapid issuance pace that has heightened worries about AI-fueled debt accumulation.

Second, long-end government bond yields in several major global economies have risen. On August 18, 10-year and 30-year U.S. Treasury yields spiked intraday to as high as 4.7% and 5.3% respectively. On one hand, the U.S. Treasury's borrowing advisory committee released a financing plan in early August indicating net issuance of $739 billion and $628 billion in Q3 and Q4 2026 respectively—markedly higher than H1—increasing supply pressure. On the other hand, since Warsh's appointment, market expectations regarding Fed rate hikes have wavered, with inflation expectations also contributing to higher long-end Treasury yields. Rising U.S. Treasury yields directly pressure valuations of long-duration growth stocks, while markets also worry that major AI leaders beginning large-scale borrowing will raise AI companies' financing costs. Consequently, global risk assets fell sharply, with the Nasdaq and Philadelphia Semiconductor Index dropping 1.3% and 5.0% respectively on the evening of August 18, and Japanese and Korean markets correcting significantly on August 19, transmitting risk-off sentiment to AI stocks. Beyond the U.S., Japan and major European countries have seen government bond yields climb to historical highs—Japan's 10-year yield reached 2.93%, a near-30-year peak, while the UK and France hit highs not seen since 2008, and Germany reached levels not seen since 2011.

Third, renewed U.S.-Iran conflict has suppressed risk appetite. On July 24, Trump announced the U.S. had reinstated a maritime blockade against Iran, and the 60-day negotiation window set by the memorandum of understanding expired on August 17, with both sides still showing significant disagreements, constraining global risk asset performance. Fourth, A-shares' own trading structure still requires repair. Since August, the small-cap style has rebounded persistently, with the CSI 1000 and CSI 2000 cumulatively rising 15% and 18% through August 18, recovering over half of previous losses, creating profit-taking pressure for short-term capital. Additionally, recent economic and financial data reveal widening divergence between new and old growth drivers domestically, making style rebalancing between emerging and traditional sectors challenging.

Awaiting improvement in external narratives and liquidity in the short term, the A-share market's recovery rally is expected to persist. Dr. Miao Yanyan of CICC, in a recent report titled "Market Direction Under 'Triple Constraints'," argues that regarding AI industry trends, the core market skepticism centers on large models' insufficient revenue generation and sustainable monetization capabilities, alongside persistently high computing costs significantly pressuring industry profitability. From a price-volume perspective, the market may underestimate AI demand growth and improvements in model and hardware performance, while leading companies' leverage remains low, suggesting the industry trend can continue. On overseas liquidity, we believe U.S. inflation may enter a downward trajectory in H2, with economic growth cooling, which does not support monetary tightening—markets may be overestimating rate hike risks. Regarding Treasury yields, on one hand, the issuance structure is dominated by short-dated debt, limiting supply pressure on long bonds; on the other hand, sustained high long-end yields would increase the U.S. fiscal burden and suppress the real economy, giving the government strong incentives to act. Combining these analyses, we believe the external narratives affecting markets remain short-term and phase-based, and the A-share recovery that began in late July is still likely to extend.

On allocation, market volatility has increased amid external shocks, with dividend-style stocks regaining favor on August 19. Looking ahead, as market risk appetite gradually recovers and the earnings season peak approaches, we recommend focusing on sectors and companies with strong earnings certainty. Two main investment lines warrant attention: 1) Growth with robust fundamentals still requires selective picking—after corrections, crowding in the tech sector has notably eased, and industries with sufficiently high prosperity can offset denominator-side drags through numerator-side growth. Segments related to AI infrastructure, such as optical communications and PCB, maintain strong high-prosperity certainty this year, while many semiconductor and computing companies still require monitoring of fundamentals-valuation alignment—tech growth stocks may exhibit divergent trends ahead. Numerous innovative drug companies are entering clinical data validation phases, deserving bottom-up attention. 2) Cyclical improvement—increasingly more sectors are recovering from cyclical bottoms. We suggest comprehensively considering geopolitical conditions and capacity cycle positions, focusing on sectors with improving earnings and supply-demand dynamics, such as power grid equipment, petrochemicals, engineering machinery, and non-bank financials benefiting from capital market improvement; the nonferrous metals sector also warrants attention after significant corrections. Progress in fundamental recovery for pure domestic-demand sectors remains relatively slow and requires further observation.