Shenwan Hongyuan Securities has released a research report indicating that the market faces a challenging environment characterized by elevated short-term inflation expectations and persistent high US Treasury yields, for which no clear resolution path currently exists. The firm advises investors to maintain patience and accept the current phase where a definitive market direction has yet to emerge, while also considering the potential catalysts for upward turning points across different time horizons.
In the short term, the risk associated with the September Federal Reserve meeting is being gradually priced in, and the conclusion of that meeting could open a modest rebound window for markets. Looking to the medium term, Shenwan Hongyuan suggests that by the time Q3 2026 earnings are reported, the process of earnings growth absorbing valuations in the communications and electronics sectors may be largely complete, potentially allowing AI computing power chains to strengthen on a differentiated basis and rekindling interest in technology themes. Over the long term, the formation of a new consensus on AI industry trends by 2027 could facilitate a renewed cycle of capital inflows, setting the stage for a significant upward market move.
The Unfavorable Global Asset Allocation Environment
The report highlights that the current global asset allocation environment remains under medium-term pressure due to elevated short-term inflation expectations and the unresolved issue of high US Treasury yields. Crucially, the firm argues that Fed rate hikes are not a solution to these problems but rather a symptom of deeper medium-term issues. Under such circumstances, capital markets remain highly sensitive to any developments related to Treasuries, inflation, and rate hikes, which continues to weigh on risk asset valuations globally.
In the immediate term, the upward breakout in US oil prices, coupled with US PPI and CPI readings exceeding expectations, has increased the probability of a September Fed rate hike, thereby suppressing global risk asset prices. Shenwan Hongyuan continues to caution that the medium-cycle issues behind elevated US Treasury yields currently lack a viable resolution pathway. The firm identifies four core factors underpinning this concern: first, weak US fiscal discipline; second, the diversification of global central bank reserve assets into gold and equities; third, debt financing within the AI supply chain diverting global allocation capital; and fourth, the manifestation of Japan's economic vulnerabilities, where policy interventions could generate selling pressure on US Treasuries.
Market participants often anticipate that medium-term problems will be met with corresponding medium-term solutions, yet the current US policy approach appears distinctly short-term in its orientation. The Bessent-style reverse operation is evidently constrained by fiscal discipline, making the lower-than-expected pace of Treasury buybacks unsurprising. Meanwhile, no clear guidance has been provided regarding monetary policy changes in the AI era, and the current policy framework appears to be shifting toward a more conservative stance. The combination of objectively existing medium-term issues and policy choices that deviate from resolving them creates a typical scenario where risk assets face sustained downward pressure.
Maintaining Patience While Identifying Potential Turning Points
The technology sector's correction and consolidation phase remains ongoing, while any potential extension of non-tech market movements is also constrained by both domestic and overseas asset allocation environments. At this juncture, investors should accept the absence of a clear market direction and exercise patience, while simultaneously contemplating potential improvement catalysts across different time frames.
In the short term, following the market correction, the risk associated with the September Fed meeting is being gradually released. Should the Fed proceed with a rate hike in September, it could directly trigger a short-term rebound. However, since a rate hike does not constitute a solution to medium-cycle problems, any such move would only represent a small-scale risk clearing event. Conversely, if the Fed opts not to raise rates in September, this could alleviate concerns over rapid tightening, potentially allowing the market to at least return to a narrow range-bound trading pattern.
Looking to the medium term, the firm points to the post-Q3 earnings period in October when earnings in the electronics and communications sectors are expected to have largely digested valuations. For sectors where the AI computational power inflation logic remains intact, the investment case can be summarized as follows: valuations no longer present obvious contradictions (trading below historical median levels), chip structure issues are easing in the short term (with short-term capital supply and demand returning to low volatility), and 2027 growth rates are projected to exceed those of 2026. While declining growth rates from 2027 to 2028 are a common phenomenon, at median valuations this may no longer serve as a drag on share prices. Such an investment case should represent a significant source of absolute returns when the market collectively looks ahead to 2027 during Q4 2026.
Against this backdrop of differentiated strength among technology leaders, market enthusiasm for exploring tech themes is likely to revive. As 2026 approaches its end, identifying themes similar to the AI applications and commercial aerospace trends seen in late 2025 and early 2026 could prove decisive. The Q4 market rhythm may align with classic US midterm election calendar effects, with markets typically weaker in September and October before regaining strength in November. For A-shares specifically, as tech earnings digest valuations to a preliminary degree, stock-level differentiation is set to begin; October through December represents a critical window for policy verification where new investment leads are likely to emerge; and as year-end approaches, expectations for a successful conclusion to 2026 build, making an early start to the spring rally highly probable.
Over the long term, while the visibility of major industrial catalysts capable of forging new consensus remains low within 2026, the continuation of optimistic AI industry trend expectations into 2027 is highly probable. Notably, in this major market cycle, allocation-type capital has been relatively abundant while offensive capital has been comparatively scarce. The May-June 2026 market movement consumed limited offensive capital, meaning that as a new consensus forms around the AI industry chain, incremental funding should remain available. The year 2027 holds promise for the reconstruction of a broad upward market wave.
Focusing on Computational Power Inflation Segments After Earnings Digest Valuations
The rebound window expected in late September appears to be narrowing, prompting greater attention to medium-term earnings digestion of valuations, particularly in computational power inflation segments where 2027 growth is expected to accelerate relative to 2026. Key focus areas include memory, high-end CCL, PCB, and capacitors. The current environment bears resemblance to the first half of 2014, characterized by short-term corrections and an extended medium-term consolidation phase.
Greater emphasis should be placed on both technology and non-technology themes. The evolution of technology themes represents a process of incubating new investment mainlines for the next phase. Despite short-term market headwinds, the market's exploration of AI industrial progress remains insufficient, preserving room for theme rotation during the subsequent rebound phase. Meanwhile, the period during which non-technology directions outperform may be prolonged, and high-dividend assets may enjoy extended periods of absolute returns.
In non-technology track directions, short-term volatility is also increasing, but medium-term key focus areas remain unchanged: CXO, innovative drugs, coal, shipping, precious metals, industrial metals, and basic chemicals. High-dividend and technology tracks exhibit a seesaw effect. The firm continues to identify high-dividend assets based on the gap between CSI 800 index weights and Q2 2026 public fund holdings, with particular focus on banks, non-bank financials, food and beverage, and utilities. Until signs of the market regaining strength become apparent, holding high-dividend positions for defensive purposes remains advisable.
Risk warnings: overseas economic recession exceeding expectations; domestic economic recovery falling short of expectations.