The Chinese A-share market demonstrated robust resilience amidst significant volatility on Monday.

Notably, the STAR 50 Index surged over 4% at the opening before encountering resistance and pulling back, even briefly dipping into negative territory. However, a strong afternoon rally led by major players in the domestic semiconductor supply chain propelled the index higher again, closing near its daily high with a substantial gain of 4.61% to set another historical record.

Concurrently, sectors like innovative drugs, as well as traditional areas such as food & beverage and non-banking financials, also stabilized, contributing to strong bullish candlesticks for indices like the Shanghai Composite. This suggests a new characteristic is emerging in the short-term A-share thematic structure, potentially fostering fresh trading opportunities.

Divergence Emerges Within the AI Hardware Sector

Recent market movements have revealed two concerning signals for bulls within the AI hardware industry.

First, leading overseas cloud providers are showing signs of tighter cash flow, implying potential constraints on future capital for expanding AI infrastructure investments and raising expectations for a possible scaling back of AI build-out. Second, reports indicate significant capacity expansion in certain AI hardware segments, such as optical fiber, suggesting supply bottlenecks could ease rapidly, potentially dampening earnings expectations for leading companies in these fields. Consequently, Monday's session saw clear momentum-driven selling in affected sectors, with leading stocks in optical fiber and electronic fabrics even hitting the daily downside limit.

However, sentiment remains strong in the domestic substitution theme. This is evident not only in the continued stronger-than-expected investment in domestic computing power but also in hardware areas like semiconductors focused on import substitution. Reports indicate that from January to May, profits for large-scale high-tech manufacturing enterprises grew 44.7% year-over-year, contributing 8.0 percentage points to the profit growth of all large-scale industrial enterprises, highlighting its leading role. As the STAR Market hosts many of China's leading high-tech listed companies, momentum capital swiftly flowed back into this direction in the afternoon, particularly towards domestic semiconductor hardware, driving the STAR 50 Index to new highs and lifting the Shanghai Composite.

Potential New Trading Opportunities Amid Style Rebalancing

This reveals a new development: the previously monolithic AI hardware theme is undergoing a degree of adjustment. The domestic semiconductor industry continues to attract momentum capital, while stocks of companies related to PCB and CPO, influenced by expectations for overseas supply chain orders, experienced significant volatility, indicating some momentum capital exit. In other words, expectations for industry prospects and the ability to deliver earnings have become the core criteria for momentum capital's current portfolio adjustments.

This also explains, to some extent, the recovery seen on Monday in innovative drug stocks and leading players in some traditional industries. Taking innovative drugs as an example, since 2026, the global expansion of Chinese innovative drugs has gained even stronger momentum. In Q1 alone, the total value of out-licensing deals for domestic innovative drugs exceeded $60 billion, nearing half of the $135.655 billion recorded for the full year 2025. As of mid-May, the total value of domestic pipeline out-licensing deals this year has reached $79.19 billion, surpassing the full-year 2024 figure. Such data underscores the positive outlook and strong earnings delivery capability of the innovative drug sector, aligning perfectly with the current criteria for momentum capital repositioning. The same logic applies to leading companies in traditional sectors like non-banking financials and certain food & beverage segments. For instance, securities stocks within non-banking financials also have optimistic earnings expectations for the first half of the year, and leading companies in sub-sectors like functional beverages and frozen foods are also anticipated to deliver promising interim reports. Having undergone significant prior corrections, these stocks now offer high value, attracting interest from some momentum capital.

In summary, the previously tightly clustered AI hardware theme is showing signs of position dispersion, with increased volatility for some constituents. Conversely, sectors like non-banking financials and innovative drugs, which experienced larger declines earlier but still possess solid earnings delivery capabilities and positive industry outlooks, are seeing momentum capital establishing positions. This pattern suggests a potential rebalancing of styles in the current A-share market, which may usher in new structural opportunities and be conducive to the further development of the market trend.