CICC 2025 Second Half Outlook: US Stocks Are Not Pessimistic, China Still Focuses on Structure, Hong Kong Stocks Outperform A Shares

According to the Zhitong Finance APP, CICC released a research report stating that the volatility in the third quarter provides opportunities; the U.S. stock market is not pessimistic, China is still focused on restructuring, Hong Kong stocks outperform A-shares, and the strong rebound phase in Europe may have passed, with attention on Japan's domestic demand. The suggested trading ideas and strategies for the second half of the year are as follows: 1) The current market overall lacks direction, and while volatility in the third quarter cannot be ruled out, it also brings allocation opportunities. Major markets have already repaired the impact of equivalent tariffs, and high expectations along with the uncertainties of tariffs themselves may trigger volatility.

1. U.S. assets are not pessimistic and may even outperform again. 1) U.S. Treasuries have trading opportunities, first long then short. Interest rates need to wait until after the peak of bond issuance supply; if it rises (such as the 4.8% high point in the past year), it provides trading allocation opportunities (with two rate cuts corresponding to a central point of 4.2%), and after the rate cut expectations are realized, shift to short-term bonds to steepen the curve; 2) If U.S. stocks provide a buying opportunity due to tariff and Treasury issues, the baseline scenario is estimated at 6000-6200, with support around 5000 points during a pullback; 3) The U.S. dollar is weak in the short term with fluctuations, and may slightly rebound in the fourth quarter; 4) Gold still has value from a long-term perspective of hedging uncertainty, but in the short term, attention should also be paid to emotional exhaustion, with the model estimating the current reasonable central price of gold at $3150~3250 per ounce.

2. The Chinese market is more focused on structural opportunities, with Hong Kong stocks outperforming A-shares. The overall market may maintain fluctuations, and if there is a pullback, it provides more opportunities to buy quality assets at lower prices to reduce overall holding costs, as the market has a bottom support, but excessive chasing of highs is not recommended due to the difficulty of significant expansion in the credit cycle. Structural growth remains the long-term direction, and in the short term, it is advisable to moderately reduce positions or shift to dividend sectors to prevent volatility and wait for opportunities.

3. The fastest rebound phase in Europe may gradually pass, while Japan's domestic demand sector can be monitored, with a moderate retention of yen exposure.

CICC's main viewpoints are as follows:

Looking back at the first half of 2025, while "equivalent tariffs" have caused turmoil in the global market, the greater aftereffect is the emergence of global "distrust" in dollar assets, making "de-dollarization" a consensus. However, this consensus, built on grand narratives and high convergence, may have two issues: ① The extent of de-dollarization may not meet expectations, ② U.S. assets may outperform again, which is a possibility worth noting in the second half of the year. In fact, since the equivalent tariffs, the unexpectedly strong performance of U.S. stocks has already shown signs of this.

So, in the face of the enormous "uncertainty" of tariffs and Trump’s policies, how can we eliminate noise and make accurate judgments? The direction of the credit cycle remains the main focus, which has been an effective framework in recent years; tariffs, fiscal policy, and AI are key to analyzing the direction of the China-U.S. credit cycle; observing the marginal changes of these variables and the relative strengths between China and the U.S. is a feasible analytical perspective.

Relative strengths of the China-U.S. credit cycle: from expansion (before last year's fourth quarter), to contraction (first quarter of this year), to rebalancing (second half of this year)

The credit cycle directly determines the direction of the economy and assets, which can be divided into three main components based on the decision-making mechanism: ① Fiscal stimulus led by government departments, ② Traditional demand such as real estate and investment adjusted by monetary policy in the private sector, ③ Emerging investments driven more by technological industry trends Since last year, the credit cycles in the United States and China have experienced a process of expansion to contraction, and may move towards rebalancing in the second half of the year. 1) Before the fourth quarter of last year, the gap between the credit cycles of the United States and China was the largest (before "924," the private sector in China accelerated deleveraging, while the Federal Reserve's interest rate cuts and Trump's expectations strengthened the recovery of private credit in the U.S.), 2) In the first quarter of this year, the gap was the smallest or even reversed, with the narrative of "the East rises while the West falls" prevailing (the U.S. faced setbacks in technology, finance, and tariffs, while China saw favorable developments in finance and technology). 3) Looking ahead to the second half of the year, the U.S. credit cycle may see some recovery, while China may enter a short pause after recovery, moving towards rebalancing.

Currently, there are three key factors jointly influencing the credit cycles of China and the U.S.: tariffs, finance, and AI, which are also the basis for the above judgment. For the U.S., tariffs directly determine whether enough revenue can be generated to support tax cuts, and also influence Federal Reserve policy and interest rates through inflation, ultimately affecting the recovery of real estate and corporate investment. For China, in the context of insufficient willingness in the private sector to leverage, tariffs will directly determine whether fiscal policy has enough momentum to leverage. Additionally, AI, as an emerging industry trend relatively independent of tariffs, is also a key factor determining the trajectory of the credit cycles in China and the U.S.

U.S.: Will expectations get worse? The credit cycle may restart, but the third quarter remains a chaotic period, with volatility providing buying opportunities

The interest rate cuts by the Federal Reserve at the end of last year and the "Trump trade" after the election jointly propelled the recovery of the U.S. credit cycle, peaking at the beginning of this year, which coincided with the peak of the dollar. However, since the beginning of the year, it has faced continuous setbacks: 1) In January, DeepSeek emerged, and AI has yet to find an effective commercialization path, increasing concerns about excess computing power and the overvaluation of the "seven sisters" of U.S. stocks, marking the lowest point of technology expectations; 2) In February, Musk led the Doge throttling, and Europe decided to increase fiscal spending and defense autonomy, marking the lowest point of fiscal expectations; 3) In April, the "reciprocal tariffs" greatly exceeded expectations, marking the lowest point of dollar credit expectations.

Looking ahead, returning to the peak is difficult and may even require some "luck" in avoiding policy mistakes, but the "error correction mechanism" has already played a role in the past month. In other words, a simple idea is that as long as these three issues do not evolve into a worse direction compared to the aforementioned lowest points, there is no need to be more pessimistic: 1) The performance and capital expenditures of leading technology companies have not been significantly affected, and the new tax reduction bill is expected to accelerate investment; 2) Musk's departure from the government efficiency department and the tax reduction bill have alleviated expectations of fiscal contraction; 3) Tariffs are likely to continue to advance, but when the market realizes that Trump's main purpose is "to get money" and the "constraints" of the upcoming midterm elections, panic is less likely to recur. If some positive catalysts, such as tax cuts and interest rate cuts, are added in the third and fourth quarters, it may drive U.S. assets to outperform.

First, the "downgrading" of tariffs buys more time and provides room for monetary policy to hedge. The foundation of U.S. growth itself is not bad; the risks mainly come from inflation causing the Federal Reserve to "watch helplessly" as growth slows without being able to cut interest rates. Calculating based on the inventory replenishment speed before the third quarter, inventory and growth can at least sustain until the fourth quarter. Meanwhile, thanks to replenishment and low oil prices, inflationary pressures can also be pushed back to the fourth quarter. This increases the probability of the Federal Reserve cutting interest rates in the fourth quarter Under the baseline scenario, it is expected that the Federal Reserve can cut interest rates twice to 3.75-4% (the real interest rate remains above the natural rate by 0.8 percentage points), which can further support the recovery of interest rate-sensitive real estate (mortgage rate 6.5% vs. rental yield 6.6%) and traditional investments (effective credit rate 6.55% vs. investment return rate 6.05%), thereby helping the U.S. to easily avoid recession.

Secondly, tax cuts support consumer spending and stimulate corporate investment. This tax cut continues and intensifies personal tax reductions, with the deficit scale approaching four times that of the 2017 bill; although the overall tax reduction for corporations is weak, the incentives are concentrated on short-term investment deductions, allowing accelerated depreciation to boost effects that may encourage capital-intensive companies' equipment investments (tax cuts may further boost investment by 20-30%). This also implies the inevitability of tariff advancement, estimating that the current effective tax rate of 16-17% brings in $300-400 billion in revenue, offsetting the average annual additional expenditure of $380 billion needed for tax cuts, thus achieving the goal of not significantly expanding the deficit ratio. It is estimated that the deficit ratio for fiscal year 2025 will shrink from 6.4% in fiscal year 2024 to 5.2%, and then expand again to 6% in fiscal year 2026. The fiscal deficit will first shrink and then expand, but the resulting debt burden will also be controllable.

Overall, the U.S. credit cycle may restart in the second half of the year, mainly relying on private sector expansion, while fiscal policy slightly contracts, which is not bad for U.S. assets. However, in terms of pace, the third quarter may still be a "chaotic period," with tariff negotiations and tax cuts yet to be implemented, and the peak of bond issuance may also push up interest rates. Based on the above analysis, if fluctuations occur, they may provide better buying opportunities. The financial liquidity model also shows that the dollar will maintain a weak oscillation in the short term, but may rebound slightly in the fourth quarter.

Of course, the biggest risk facing this judgment is the rhythm of policy coordination and the arbitrariness of policies, which is closely related to tariff progress, where one link affects another, and one misstep leads to further mistakes. For example, if tariffs are significantly upgraded again, it will not only undermine market confidence but also put the Federal Reserve in a dilemma, pushing up inflation or even stagflation risks; however, if tariffs cannot be implemented, it may also lead to difficulties in tax cuts. Additionally, if policies hastily guide the depreciation of the dollar, it will greatly disrupt the dollar system and capital flows.

China: Can expectations be better? Credit cycle recovery temporarily stalled; excess liquidity chasing limited quality assets leads to "asset scarcity" and structural market

In contrast to the U.S., China's credit cycle is still in a contraction phase, primarily due to costs exceeding return expectations, which suppresses the private sector's willingness to actively leverage. Taking real estate as an example, a 3% mortgage cost is still higher than the rental yield of less than 2% in most cities. The key to addressing this situation lies in improving return expectations; after all, lowering costs is not a fundamental solution, and low interest rates and excess liquidity also limit the marginal effectiveness of monetary policy. The key to improving return expectations requires a strong counter-cyclical fiscal push or the stimulation of new growth points, which is also the core reason for the market rebound since the end of last year.

Looking ahead, using a simple approach of marginal changes, compared to the fiscal expectations during "924," the AI expectations after January DeepSeek, and the current 10% equivalent tariff, it will be challenging to see scenarios stronger than these three peak expectations Specifically,

Fiscal: After the "924" policy last year, fiscal efforts offset the credit contraction in the private sector, but fiscal policy slowed again after the private credit no longer accelerated its contraction at the end of last year, indicating that the policy remains "reserved." Recently, private credit has once again turned to contraction. The current tariff reduction has further lowered the urgency for short-term policy efforts. It is estimated that the current 30% tariff requires an additional fiscal expenditure of 1-2 trillion yuan, but the "Two Sessions" have already arranged 2.1 trillion yuan, which is sufficient to meet this gap. It is estimated that an additional fiscal expenditure of 6-8 trillion yuan within the year could compensate for the output gap since the pandemic, bring the broad fiscal deficit pulse back to historical highs, and align the growth rate of social financing with nominal growth; this expectation is clearly unrealistic.

AI: The breakthroughs in AI at the beginning of the year significantly boosted market expectations for investment in the technology industry and the narrative of re-evaluating Chinese assets. However, after the initial surge in sentiment, investment and application of AI have also cooled down. There is still confidence in the direction of the technology industry, but raising expectations to the early year's peak, as well as the boosting effect on the overall economy (the new capital expenditure of tech giants accounts for 0.1% of GDP) and total factor productivity, will likely require more catalysts.

Tariffs: After significant upgrades and downgrades, the current 10% reciprocal tariff rate may be the "best scenario" for the foreseeable future. If it applies a 10% baseline tariff like other markets, it would have almost no impact, and there would be no need for transshipment to avoid costs.

Overall, while it may not return to the low state before the third quarter of last year, it is challenging to significantly exceed the previous peaks in these three dimensions. In the second half of the year, China's credit cycle may enter a phase of fluctuation, reflected in the stagnation of private credit pulses and a slowdown in fiscal efforts.

The "limited efforts" of policies and the "partial pull" of technology and new consumption have prevented the credit cycle from contracting again but also made it difficult to transform into a comprehensive recovery. For the market and assets, the "funding boom" of excess liquidity and the "asset scarcity" of limited returns will lead to overall indices lacking trending opportunities and fluctuating within a range, while structural markets will thrive. Investors should either 1) flock to stable return or value-preserving assets (such as deposits, government bonds, dividends, and gold), or 2) invest in growth-oriented return assets (such as technology, new consumption, innovative pharmaceuticals, etc.). These two directions are primarily represented in the Hong Kong stock market, which explains the heat in the Hong Kong stock market and southbound capital. In the long run, as long as the issue of credit cycle contraction is not resolved, this structural allocation direction is likely to continue for a long time. However, in the short term, the influx of excess liquidity into a small number of quality assets will also lead to valuation increases, which need to be guarded against overextension. Therefore, actively intervening during downturns and taking profits in times of exuberance (trading in waves), while focusing on structural directions (structural trading), may still be an effective strategy