The further upward momentum of A-shares: looking externally at the Federal Reserve, and internally at anti-involution and the "14th Five-Year Plan"

Full Text Summary

Introduction: Last week, the Shanghai Composite Index fluctuated around 3,800 points, showing that the current market still exhibits clear bull market characteristics, and many hold the view that "it will break 4,000 points within the year." On one hand, we also acknowledge that "the bull market has not ended," and the major index will continue to maintain strength in September; on the other hand, standing above 3,800 points has basically met our psychological expectations for this round of liquidity bull market. Currently, the "water buffalo" market is experiencing the "bull tail" phase, and we will maintain a tracking attitude. Although there is a possibility of further upward movement, it is currently difficult to reasonably estimate the short-term upward space for the major index.

At present, we are closely monitoring two marginal changes that could drive the major index further upward: 1. Whether the U.S. will clearly enter a "rate-cutting cycle" after a high probability of rate cuts in September (corresponding to low-tech and strong β varieties catching up); 2. Whether China can clarify the "A-share earnings bottom" in the context of previous anti-involution and the subsequent 14th Five-Year Plan in October (corresponding to the transition from liquidity bull to fundamental bull). In this regard, we still emphasize: 1. It is not advisable to transition from a slow bull to a fast bull or even form a crazy bull; 2. Further upward space still relies on the gradual realization of the "three bulls" over the next year.

From a structural perspective, last week, the ChiNext Index continued to lead the gains, aligning with our prediction since early July that "the Q3 winner will be the ChiNext Index + technology based on industrial logic." It is worth noting that the style in September will be more balanced. According to the "A-share high-cut low market index" reaching a high range, it indicates that the possibility of low-level catch-up is increasing, which was quite evident in last week's high-cut low phenomenon within A-share technology (lithium battery and new energy catch-up). At the same time, we still emphasize that the characteristics of A/H rotation rising this year + the high probability of rate cuts in September may imply that our previous view that "Hong Kong stock technology (Chinese concept internet) will catch up" will be reflected in September. Additionally, attention should be paid to the marginal positive pricing impact of rate cuts in early September on certain resource products (gold, silver, copper) and the Mid-Autumn Festival and National Day holidays in late September + the implementation of national subsidies on certain consumption.

Last week, the Shanghai Composite Index fell by 1.18%, the CSI 300 fell by 0.81%, the ChiNext Index rose by 2.35%, and the Hang Seng Index rose by 1.36%. The growth style outperformed the value style. During this process, the average daily trading volume across A-shares was 2.6032 trillion, with a slight decline in volume compared to the previous period. Meanwhile, the Shanghai Composite Index fluctuated around 3,800 points, showing that the current market still exhibits clear bull market characteristics, and many hold the view that "it will break 4,000 points within the year."

Objectively speaking, on one hand, we also acknowledge that "the bull market has not ended," but on the other hand, we emphasize that "blindly referencing the 2014-2015 model, leading to a transition from a slow bull to a fast bull or even forming a crazy bull is indeed inadvisable." The distinguishing point is that the incremental funds in this round are more derived from the rebalancing of debt-to-equity swaps, and such funds have higher requirements for valuation and fundamental matching. We firmly believe that further upward space at the current level still relies on the gradual realization of the "three bulls" over the next year. In fact, we have repeatedly emphasized: since the 924 market, the Shanghai Composite Index has risen by more than 45%, and since the April "golden pit," it has risen nearly 25%. Standing above 3,800 points has basically met our psychological expectations for this liquidity bull market. Therefore, the market fluctuations last week were not unexpected, and we will continue to track the situation. At present, it is difficult to reasonably estimate the further upward space for the short-term index.

Looking ahead to September, we previously proposed: the A-share index will continue to maintain a strong high-level fluctuation under the theme of "banks setting the stage, and the bulls performing." At the same time, we are closely tracking two marginal changes in the further upward momentum of the index:

1. From the perspective of the liquidity bull market, whether the Federal Reserve is likely to cut interest rates in September means entering a "rate-cutting cycle," which in turn may weaken the dollar index and lead to a shift from dollar assets to non-dollar assets: this month's non-farm employment data fell short of expectations, and the unemployment rate rose to 4.3%, reflecting the weekly increase in initial jobless claims since the central bank's annual meeting. Currently, the CME has fully priced in that the Federal Reserve will cut rates in September, with the probability of a 50bp cut rising to 14%. We believe that the unemployment rate, which the Federal Reserve cares more about, has not yet reached the Sam rule. In addition, the labor participation rate and average wage growth in August remain stable, and the weakness in non-farm employment alone may not support an unexpected rate cut.

Considering that historically, the impact of tariffs on inflation often has a lag period of about 3 months, the fully implemented reciprocal tariffs in August may be fully reflected in November. The announcement of the November CPI coincides with the December FOMC meeting, and if inflation stabilizes at that time, it may initiate a continuous rate-cutting cycle.

2. From the perspective of a fundamental bull market, the recent market rise is difficult to link to fundamentals. Although the decline in industrial profits narrowed in July and the PMI rebounded in August, the motivation for inventory replenishment is insufficient, and demand-side constraints still exist. The PMI rebound is mainly attributed to the rise in upstream prices under the "anti-involution" disturbance. However, the supply side is pushing for "PPI stabilization and rebound" through "anti-involution," indicating that the bottom of A-share profits in this round is still a long way off.

According to the mid-term report observations, A-share profit growth remains weak, suggesting that a reversal in A-share fundamentals in the second half of the year still needs to be tracked, especially regarding the recommendations for formulating the 15th Five-Year Plan for national economic and social development in October 2025 and the subsequent U.S. budget planning for the next fiscal year.

On the structural level, last week the ChiNext continued to lead the rise, aligning with our two viewpoints from "Best Choice: Innovation" and "First Challenge the Barbell Excess!" since early July: 1. "Anti-barbell excess": The effectiveness of the barbell strategy represented by banks and micro-disks is declining, corresponding to "intermediate assets" welcoming absolute and excess returns. 2. "Q3 key to victory is ChiNext + technology innovation based on industrial logic."

In fact, even though we firmly recommended the ChiNext in the past 7-8 months, we must admit that the ChiNext has risen to this level, and future predictions have exceeded our capabilities.

It is worth noting that: in a major bull market, when the main index accelerates upward or structural overheating occurs, fluctuations often happen. At the same time, there will be periodic style switches, and the attributes and preferences of marginal incremental funds determine the phase main line direction of the bull market. From historical experience, a strong fundamental direction is the most secure direction in a bull market, often running through the entire period; purely based on liquidity-supported varieties according to "A-shares high cutting low index," if at a high range, timely high cutting low is needed.

Looking ahead to September, we believe that the market style will become more balanced. According to our exclusively constructed "A-share high-cut low market index," it is noteworthy that this indicator has once again approached the upper range, indicating an increasing possibility of a rebound from low levels, which is also evident in the high-cut low within the technology sector.

At the same time, considering the A/H rotation rise characteristics since the beginning of this year, the high probability of interest rate cuts in September, and the marginal impact of takeout services easing, this may suggest that our previously proposed view of "Hong Kong stock technology (Chinese concept internet) catching up" may be reflected in September.

Additionally, attention should be paid to the impact of interest rate cuts in early September on certain resource products and the marginal positive pricing impact on the consumer sector from the Mid-Autumn Festival and National Day holidays in late September, along with the implementation of national subsidies.

In summary: Based on the "anti-barbell excess - middle asset reversion" style shift, our repeatedly emphasized view is that the upward space for the main index truly opens up when the market transitions from liquidity bull - fundamental bull - new and old momentum transformation bull, realizing the "three bulls" transformation. This is a process that will be gradually verified over the next year: 1. Short-term liquidity bull market + 2. Medium-short term fundamental bull (based on the resonance of China, the US, and Europe to achieve economic cycle reversion, expected to start before the end of the year, still needs observation and confirmation) +3, Medium to long-term new and old momentum conversion bull (based on the gradual end of the negative impact of real estate on the economy, still need to observe confirmation).

Accordingly, our current structural ranking is: 1. Liquidity bull market: undervalued large-cap technology growth (such as ChiNext) + technology innovation categories based on industrial logic (innovative drugs, AI, and semiconductors); 2. Fundamental bull market: going overseas + globally priced resource categories (waiting for the resonance of the economies of China, the US, and Europe); 3. New and old momentum conversion bull: domestically priced cyclical goods + traditional consumer large-cap growth (post-cycle).

Main Text

1. Recent Important Trading Characteristics of the Equity Market

Combining recent communications with market investors and reviewing last week's global and A-share market trends and environment, there are several characteristics worth noting:

Last week, major US stock indices had mixed performances. As of Friday, September 5, 2025, the Nasdaq rose 1.14%, the S&P 500 rose 0.33%, and the Dow Jones fell 0.32%. On the market, the communication services sector led with a 5.07% increase, followed by consumer discretionary, healthcare, consumer staples, and information technology, which rose 1.59%, 0.35%, 0.34%, and 0.19%, respectively; real estate, materials, industrials, utilities, and financials had smaller declines, falling 0.34%, 0.37%, 0.86%, 1.06%, and 1.72%, respectively; energy had a larger decline, falling 3.52%.

Last Monday, US stocks were closed for Labor Day, and on Tuesday, after a low opening due to last week's tech stock sell-off, they rose continuously, only to retreat on Friday. From the performance and news of overseas markets, the main influencing factors are as follows: 1. On September 3, a federal judge ruled that Google does not need to divest its Chrome browser business in a highly publicized antitrust case, but is required not to enter into exclusive search agreements and must share some search data, causing Alphabet's stock price to soar 9.1% that day. 2. The ISM services PMI index for August recorded 52, up from the previous value of 50.1, exceeding the expected 51. The manufacturing PMI slightly rebounded to 48.7, and both the services and manufacturing new orders indices exceeded expectations and rose above the expansion-contraction line. 3. Last week's non-farm payroll data was below expectations, and the market's expectation for a rate cut by the Federal Reserve in September has reached 100%, but it also raised concerns about an economic recession, leading to a retreat after a high opening on Friday.

**We believe that under the pressure of profit-taking from the high positions of tech stocks in the US last week, the US stock market rebounded moderately amid softer PMI data and strong rate cut expectations, but after the "bad news is good news" expectation for employment data peaked, concerns about an economic recession again suppressed the US stock market, leading to a decline **

European stock indices showed mixed results. The Eurozone STOXX50 (Euro) closed down 0.63%, Germany's DAX fell 1.28%, France's CAC40 decreased by 0.38%, while the UK's FTSE 100 rose by 0.23%. Last Tuesday, the deterioration of fiscal conditions in major European economies and political uncertainty led to a significant rise in European bond yields, reaching their highest levels since 2011 and 2009. The British pound weakened significantly against the US dollar, putting pressure on European stock markets as risk aversion increased.

Last week, Hong Kong stocks rose broadly. The Hang Seng Index increased by 1.36%, and the Hang Seng Tech Index rose by 0.23%. By sector, healthcare, materials, and consumer discretionary saw significant gains, rising by 7.07%, 6.61%, and 3.60% respectively; energy, utilities, conglomerates, information technology, and real estate construction had smaller gains, with weekly increases of 1.59%, 1.16%, 0.63%, 0.32%, and 0.13% respectively; industrials, financials, and consumer staples saw slight declines, falling by 0.02%, 0.07%, and 0.45% respectively; the telecommunications sector experienced the largest drop, falling 3.71% last week. Last Monday, major tech stocks in Hong Kong opened higher collectively, with Alibaba rising 14.95% on strong interim results. However, concerns over profit-taking and regulatory cooling measures from mainland authorities led to three consecutive days of declines in Hong Kong stocks. On Friday, amid weak US ADP employment data raising expectations for interest rate cuts, the Hang Seng Index rebounded, increasing by 1.43%.

First, last week the Shanghai Composite Index fell by 1.18%, the CSI 300 dropped by 0.81%, the CSI 500 decreased by 1.85%, the ChiNext rose by 2.35%, and the Hang Seng Index increased by 1.36%. Growth style outperformed value style, with small-cap stocks leading the declines. In terms of sectors, the power battery and photovoltaic inverter industries led the gains. Last week, the average daily trading volume of the entire A-share market was 2.6032 trillion, a decrease compared to the previous week.

Secondly, in terms of incremental funds, southbound funds resumed inflow in June and accelerated inflow from July to now. Last week, southbound funds continued to net inflow, with a cumulative inflow of southbound funds into Hong Kong stocks reaching 941.7 billion yuan since 2025. Structurally, compared to the comprehensive inflow of high-dividend southbound funds in May and June, in August, southbound funds began to comprehensively flow into growth sectors such as the internet (Alibaba, Tencent, Meituan, etc.) and automobiles (Xiaomi Group, Li Auto, BYD), while the high-dividend sector mainly saw inflows into the insurance sector. In terms of net outflows, they were mainly concentrated in innovative drugs, banks, and new consumption.

Regarding ETF funds: Last week, ETF funds showed significant differentiation, with the CSI 300 ETF experiencing a slight net outflow of 768 million yuan, while the SSE 50 ETF and the CSI 500 ETF saw net inflows of 2.924 billion yuan and 2.947 billion yuan, respectively. The market-performing STAR Market ETF continued to see outflows of 4.653 billion yuan. In terms of thematic ETFs, consumption and brokerage ETFs had net inflows of 4.343 billion yuan and 8.175 billion yuan, while Hong Kong stock internet saw a further significant net inflow of 11.252 billion yuan.

Thirdly, last week the Shanghai Composite Index fluctuated at a high level, and the ChiNext Index continued to rise sharply, aligning with our view since July that the key to the third quarter is the ChiNext and STAR Market, as well as the "barbell strategy" being dominant. In the short term, the market is still in the process of the liquidity-driven "first bull," waiting for fundamental verification and the diffusion of prosperity before entering the "second bull" (see previous weekly report "On: Three Bulls"). The characteristic of liquidity-driven markets is that in the face of continuously new high sectors, funds will choose to switch and rotate between high and low, especially for the currently extreme growth style. If we can confirm at the end of June that the ChiNext Index is a sector in a valuation trough, then with the significant rise of the ChiNext Index, The stagnation of Hong Kong's technology and internet stocks, which are also heavily weighted by institutions, is even more pronounced. Here, we present observations from three perspectives:**

From a trading perspective, since we proposed "the best choice: ChiNext" at the beginning of July, the ChiNext index has surged by 34%. This increase surpasses that of the CSI 2000 and other small-cap indices, while the STAR 50 has nearly caught up with the ChiNext index's year-to-date increase of 33% after a significant rise in the past two weeks, leading major broad-based indices by a large margin. In stark contrast, the Hang Seng Index and Hang Seng Tech have only risen by 4.18% and 7.01%, respectively, even lower than the CSI 300 and SSE 50 indices.

Using the 2021 peak as a reference, we calculated the required increase for the current core indices to reach their 2021 highs. The Shanghai Composite Index has already surpassed its 2021 peak, while the Wind All A and CSI Dividend indices have nearly caught up with their 2021 highs. The CSI 2000, representing small-cap stocks, has clearly exceeded its 2021 peak. Currently, the Hang Seng Tech has the largest relative distance from its 2021 peak, with its current level only half of the 2021 high.

Further comparing the Hang Seng Tech and ChiNext, both of which have "institutional heavy positions" and "anti-barbell strategy" attributes, we observe a clear alternating rotation historically in their 60-day rolling return differentials. When the ChiNext index outperforms the Hang Seng Tech by more than 20 percentage points, it often indicates a reversal in the relative returns of the Hang Seng Tech (the extreme case being the extreme institutional clustering in 2021, which led to a return differential expansion of over 30 percentage points). Currently, this return differential has reached 34 percentage points, approaching the historical extreme level of 2021, which also supports our conclusion: Hang Seng Tech internet stocks are likely to become a supplementary direction under the anti-barbell strategy.

From a funding perspective, Hong Kong stocks are currently relatively low-priced, but there is a continuous influx of incremental capital. On one hand, southbound funds have accelerated their inflow into Hong Kong stocks recently, with a net inflow of nearly 900 billion yuan this year, and a net inflow of 190.3 billion yuan since July, with a clear shift in direction from high dividends to internet stocks (Tencent, Xiaomi, Alibaba, etc.), automobiles, and some innovative drugs. On the other hand, a large amount of capital has significantly net flowed into the Hang Seng Tech/Hang Seng Internet ETFs, with a cumulative net inflow of 47.6 billion yuan since July.

From a macro perspective, Powell's speech at the Jackson Hole central bank annual meeting conveyed a relatively dovish signal, with a high probability of interest rate cuts starting in September, which will directly alleviate the liquidity crisis faced by Hong Kong stocks since August. Since mid-August, the HIBOR rate, which had remained low since June, suddenly began to soar, with the overnight HIBOR rate spiking by 260 basis points, while the Hong Kong dollar surged against the US dollar, leading to a tightening of liquidity in the Hong Kong interbank market. This significant tightening of liquidity in the Hong Kong market is similar to the yen last August, the New Taiwan dollar from April to May this year, and the Hong Kong dollar, marking a reversal of a new round of carry trade Due to the continuous weak-side protection of the Hong Kong dollar exchange rate since mid-June, the Hong Kong Monetary Authority passively withdrew about HKD 120 billion in liquidity, nearly exhausting the HKD 130 billion liquidity injected in May. The overnight HIBOR has gradually risen since late July, reaching a level of 2.89% on August 19. As a result, large-scale carry trades began to unwind starting August 13. Short sellers of the Hong Kong dollar were forced to buy back Hong Kong dollars to close their positions, driving the Hong Kong dollar exchange rate to soar; or they borrowed Hong Kong dollars to cover their positions, leading to a sharp rise in Hong Kong dollar interbank lending rates. Historically, a severe tightening of liquidity tends to have a short-term impact on the Hong Kong stock market, and combined with the significant liquidity-driven market in the A-share market, this has resulted in the Hong Kong stock market performing weaker than the A-share market since August this year.

A positive change is that after Powell's dovish remarks, the depreciation of the US dollar and the decline in US Treasury yields have effectively alleviated the liquidity pressure faced by the Hong Kong dollar during its appreciation process. Historically, the absolute return performance of the Hang Seng Tech Index during the Federal Reserve's rate-cutting phases has been relatively outstanding.

In the medium to long term, considering the current economic situation in our country, it cannot be asserted that the transition from old to new driving forces has been successful. However, referencing Japan's experience around 2012, when industries representing new driving forces emerge intensively, it often heralds a market trend led by large-cap growth and leading enterprises (the so-called "intermediate assets") Although the "barbell strategy" has not become ineffective, it may face periodic challenges. We believe that the current mid-range assets (large-cap growth) primarily earn money from two parts: first, from the stabilization of the economy and the bottoming of profits, followed by the correction of pessimistic expectations and the restoration of valuations; second, from performance growth after the economic recovery. Currently, the primary earnings come from the first part, and the challenge to the "barbell strategy" from this large-cap growth may fail, as the second part of the earnings may not be realized, requiring ongoing observation of the impact of industrial catalysts, policy support, and downstream demand on economic conditions.

Fifth, the market has recently experienced some volatility, especially with the Shanghai Composite Index dropping 1.76% on August 27, and a "three consecutive declines" in the index from September 2 to September 4 last week. Market participants inevitably expressed some concerns about the market overheating. However, based on our assessment of market risk appetite, we believe that the recent market fluctuations are not a signal of a trend reversal, but rather a signal of oscillation during a bull market. Overall, the funding sentiment remains very positive, and the upward trend may not have completely ended. Referring to the characteristics of market fluctuations during historical bull markets, we believe a clear response strategy is to maintain a high level of participation while switching between high and low positions. Specifically:

The core basis for risk appetite assessment is the funding situation: For active funds, although the process of increasing main positions was completed in June and July, the incremental funds for active funds since August have not been sufficient. However, as funds targeting relative returns, even if they believe they are close to the market peak, they will not rashly exit before the peak; regarding fixed income + funds, since August, there have been some marginal changes in the characteristics of the stock-bond seesaw, especially in the past two weeks, where the bond market has become sensitive to the rise of stock indices but dull to their decline. In other words, when stock indices rise, bond funds accelerate their inflow into the stock market, while stock index declines do not attract bond market funds back. This is because, in a bull market atmosphere, bond funds feel stronger short-squeeze pressure, and the rising bond yields further exacerbate the process of fund transfer from bonds to stocks through reflexivity; regarding financing funds, as a representative of high-risk appetite funds and market sentiment, the current financing balance has reached 2.2 trillion, surpassing the March peak of 1.94 trillion, and continuously setting new highs, with net inflows of financing exceeding 300 billion since July, indicating a significant increase in the activity of financing funds. The risk appetite of retail investors we track has also reached 67.15%, a level that has exceeded the 2021 peak and is approaching the Q1 2019 peak (only lower than the 9.24 market in the past decade). Even on the day of the market's significant drop on August 27, financing funds still flowed in against the trend by 20.2 billion, indicating that although market volatility has intensified recently, there are no signs of a decrease in risk appetite. From the structure of the inflow of financing funds into individual stocks, there is a concentrated inflow into leading companies in various sub-segment growth sectors, including the telecommunications sector and the new energy lithium battery sector. Additionally, there is also an inflow of financing funds in the semiconductor and non-ferrous metal sectors.**

Sixth, if the market's upward momentum slows down and volatility increases, how should we respond? Referring to the historical patterns of market adjustments during major bull markets, our conclusion is:

First, from the perspective of volatility characteristics, although there are significant differences in causes, duration, and amplitude, each bull market will experience about two rounds of relatively obvious and sustained volatility, during which the main index will fluctuate or adjust, averaging 20-40 trading days (mean of 33 trading days), with an upward and downward amplitude between 10% (±5%) and 20% (±10%).

Secondly, from the market structure perspective, in fundamentally driven bull markets (such as in 2009 and 2006), the mainline varieties with strong fundamental support will not be significantly affected after the volatility; whereas in liquidity-driven bull markets (such as in 2014-2015), varieties purely supported by liquidity will show significant high-low switching during the volatility.

To characterize the rhythm of high-low switching, we constructed an A-share high-to-low market tracking indicator based on the rolling return differentiation of 130 secondary sub-sectors. Currently, this indicator has reached a high point in the range, close to the peak of the technology market in February 2025. This indicates that the possibility of excess rebound for currently (relatively) low-position varieties is increasing.

Among the low-position sectors with significant rebound potential, aside from the previously discussed Hong Kong stock technology/Internet sectors, we clearly propose that the directions worth focusing on are those with improved mid-term report prosperity but relatively low previous gains: new energy, overseas expansion, and non-ferrous metals. The main basis is the A-share prosperity investment effectiveness index we constructed, which has gradually risen since 2023 and turned positive in August, reaching 8.20%. This means that the correlation between fundamentals and price fluctuations is strengthening.**

Sixth, the current short- to medium-term market asset price evolution path shows a high degree of similarity to 2009 and 2014, both exhibiting the typical characteristics of "social financing recovery + proactive bank credit expansion + stock-bond fund reallocation." In 2009 and 2014, the macro environment experienced a phase of weak external demand and rising internal deflationary pressure, while policy measures countered the demand downturn through credit expansion, resulting in an accelerated broad credit issuance by the banking system and a synchronized rebound in social financing growth. Evidence of proactive credit expansion by commercial banks is reflected in the fact that since the beginning of the year, social financing growth has bottomed out and rebounded, alongside a decline in broad interest rates, indicating that the growth in credit is more supply-driven rather than demand-pulled.

Similarly, since 2025, commercial banks have once again demonstrated a strong willingness to extend credit, and against a backdrop of weak real demand, credit expansion has shown more supply-driven characteristics. In this process, funds have been actively injected from the banking system into the non-financial sector, indirectly promoting the valuation recovery of the stock market (especially small and mid-cap stocks) and the decline in bond market interest rates, forming a typical reallocation of funds from bonds to stocks.

Based on the analogy of market evolution patterns under the logic of proactive credit expansion, using 2014 as a reference, we can observe that the entire style rotation pattern is reflected in the fact that at the beginning of 2014, banks took the lead in pushing the index upward, which was then followed by non-banks. By mid-2014, banks gradually underperformed, but the technology growth style took over, culminating in a collective explosion of the large financial sector represented by banks, insurance, and securities firms at the end of 2014, accelerating the index to its peak. The same pattern also applies to 2015, where after the large financial sector's explosion at the end of 2014, risk appetite and liquidity quickly overflowed into the technology growth style, leading to a shift in style from large financials back to technology growth

Seventh, the core of the medium to long-term judgment on the trend: we believe that although there are uncertainties in short-term issues (domestic hedging policies, fundamentals, and China-US tariff issues), there has been an optimistic improvement in the recognition of a series of medium to long-term pessimistic problems. When the proportion of real estate + construction in China's GDP stabilizes, and the new economy further increases its share, corresponding to a stable growth rate of China's GDP, then to some extent, the Chinese economy completes the narrative shift from real estate to manufacturing. This change may occur at some point in the future, similar to the Japanese stock market after 2012. Especially in the recent process where favorable news continues to emerge in various fields, the market gradually realizes that "the beginning of the year AI technology DeepSeek 1.0" + "May military technology DeepSeek 2.0 moment" + "the unstoppable tide of exports" + "the drag of real estate on the economy is nearing its end," then the Chinese economy will drive the pricing of the transformation of old and new kinetic energy. In this context, the main index will achieve a continuous upward shift in its oscillation center, and this confidence will continue to support market sentiment, making the market stronger than expected.

Structurally, based on the four-stage pricing of the transformation between old and new momentum in the Japanese stock market, the four stages correspond to "interweaving of old and new," "new surpassing old," "the swan song of the old," and "the new era." Currently, the A-share market is in the "new surpassing old" stage of the transformation between old and new momentum. Here, the basic meaning of "new" is: 1. New trends: Hong Kong stocks are expected to gradually become China's new core assets; 2. Going overseas will become a new decisive factor for the growth of the A-share market; 3. New technology: A-share hardware technology (AI semiconductors, military + innovative drugs) + Hong Kong stock software technology (internet + intelligent driving); 4. New models: A new era of consumption investment centered around the new consumption 50 combination.

Based on the "barbell excess - intermediate asset reversion" style switch, and combined with observations of the market over a longer period, we propose a new viewpoint: "Three Bulls": 1. Short-term liquidity bull market + 2. Medium-short term fundamental bull (starting before the end of the year, still needs observation and confirmation) + 3. Medium-long term new and old momentum transformation bull (still needs observation and confirmation), corresponding to the internal rotation order of intermediate assets: 1. Technology blue chips (ChiNext + technology innovation based on industrial logic) — 2. Large-cap growth centered on going overseas + globally priced resource products — 3. Domestic old economy representative cyclical varieties leading the rise.

Short-term liquidity bull market: The continuous return of non-US assets due to a weak external dollar + the rebalancing of internal stock and bond asset allocation are jointly promoting liquidity easing in the stock market. It can be seen that current incremental funds from public offerings, insurance, foreign capital, and retail investors are already showing signs of resonance inflow. Unlike the 2015 bull market where the increment came from off-market financing and leverage, this time the incremental funds are more from the rebalancing of debt to equity after the improvement of mid-term pessimistic expectations. Such funds still have high requirements for the matching of valuation and fundamentals, which constrains the upward space of the current pure liquidity bull market. Structurally based on the theory of active credit creation, liquidity will gradually spread from absolute undervaluation to relative undervaluation, showing a historical pattern where banks rise first, non-banks follow, and then technology and undervalued large-cap growth rise. Among them, technology innovation based on industrial logic and ChiNext benefit from low valuations and superior performance growth within broad-based indices, which may become the most rewarding direction.

Medium-short term fundamental bull: Although domestic "anti-involution" provides certain support for inflation, corresponding to the August PPI, which may stabilize and rebound, we still tend to believe that the core driving force of the fundamental bull lies externally, that is, there may be a "China-US-Europe resonance theory" before the end of the year, corresponding structurally to large-cap growth centered on going overseas + globally priced resource products will dominate. Currently, the strong export data in July proves the relative prosperity of the European market For the U.S. economy, short-term inflation expectations rising may trap it in "stagflation" troubles, leading to potential volatility risks in U.S. stocks. However, given that the inflation rise is not based on overheating consumption and that one-time tariff shocks will not cause sustained inflation; meanwhile, the U.S. unemployment rate is at a low of 4.2%, and the strong spending in the AI sector along with the resilience of U.S. consumption keeps U.S. stock earnings robust. Subsequently, the Federal Reserve may cut interest rates in September + the Inflation Reduction Act will promote the expansion of U.S. fiscal spending. If we can see a resolution to global tariff issues within the year, and if global fiscal expansion drives PMI expansion, under the premise that business inventories in China, the U.S., and Europe are not high, this easing of political game forces and the reversal of economic cycle forces could lead to a resonance similar to the "China-U.S.-Europe resonance theory" of 2020, then the market will transition from a liquidity bull market to a fundamental bull market.

Medium to Long-term Transition from Old to New Drivers Bull Market: Corresponding to the pricing of a major market reversal, the structure shifts from "new surpassing old" to "the old's swan song," with cyclical varieties represented by the old economy leading the charge domestically. China is boosting consumption, providing fiscal support, loosening monetary policy, and transforming structurally across four fronts, facing real estate deleveraging and a stabilization turning point in core city housing prices. The "14th Five-Year Plan" may encourage policies in technological innovation and high-end manufacturing, particularly forming a "new narrative" in AI, innovative drugs, military industry, new consumption, and going overseas. Therefore, when the proportion of real estate + construction in GDP stabilizes and the new economy further increases its share, corresponding to a stable GDP growth rate in China, similar to Japan around 2012, achieving a core economic support shift from manufacturing replacing real estate, driven by fiscal efforts - real estate stabilization - and the transformation of old and new drivers, a systemic broad-based pricing may emerge at some point in the future. Further, based on the four-stage pricing of the new and old drivers transition in the Japanese stock market, A-shares are currently in the "new surpassing old" stage of the transition, but one must always pay attention to the transition to "the old's swan song." In this stage, the excess of the barbell and new economy will disappear, replaced by cyclical varieties represented by the old economy leading the charge.

Last week, U.S. Treasury yields fell, with the 3-month Treasury yield closing at 4.07%, down from 4.23%; the 10-year Treasury yield closed at 4.10%, down from 4.23% the previous week.

Last week, long-term U.S. Treasury yields first rose and then fell, with the main influencing factors as follows: First, on Tuesday, the deterioration of fiscal conditions in major European economies and political uncertainty led to a significant rise in European bond yields, triggering a global debt trust crisis, resulting in a substantial sell-off of long-term U.S. Treasuries that day. Second, both the small and large non-farm payroll data last week fell short of expectations, with market expectations for a Federal Reserve rate cut in September reaching 100%. Third, Federal Reserve Governor Waller reiterated a dovish stance, stating that rate cuts do not have to follow a "fixed pace," and policymakers can "observe the developments," with multiple rate cuts potentially seen in the next three to six months We believe that last week, influenced by the European debt shock, long-term U.S. Treasuries experienced a correlated sell-off, but subsequent statements from Federal Reserve officials and disappointing employment data led to heightened market expectations for interest rate cuts, while also triggering concerns about an economic recession, causing long-term yields to fall again.

Last week, the U.S. dollar index fluctuated slightly weaker, closing at 97.7357 on September 5, down from the previous week's value of 97.8477.

The significant fluctuations in the dollar index were mainly influenced by the following factors: First, on Tuesday, the deterioration of fiscal conditions in major European economies and political uncertainty led to a sharp rise in European bond yields, triggering a global debt trust crisis, resulting in a substantial sell-off of long-term U.S. Treasuries that day. Second, last week's non-farm payroll data was below expectations, and market expectations for a rate cut by the Federal Reserve in September reached 100%.

Last week, the dollar index experienced significant fluctuations; specifically, on Tuesday, influenced by the European debt shock, the dollar rose sharply against the British pound and the euro, pushing the dollar index up, but then fell sharply on Friday due to disappointing employment data, resulting in a slight overall weakening for the week.

Last week, the latest price of London gold was 3586.00, up from the previous week's value of 3446.81, while the latest price of COMEX gold futures was 3600.80 USD/ounce, an increase from the previous week's value of 3475.50 USD/ounce.

The main influencing factors were as follows: First, on Monday, Trump stated that the judge handling the case against Federal Reserve Chair Jerome Powell was an African American woman with a conflict of interest with Powell and should be replaced. Second, a U.S. appeals court ruled that most tariffs from the Trump era were "illegal," and Trump claimed that if the case went to the Supreme Court and he lost, it would cause "perhaps unprecedented turmoil," but if he won, the stock market would "skyrocket." Third, last week's non-farm payroll data was below expectations, and market expectations for a rate cut by the Federal Reserve in September reached 100%. Fourth, on Tuesday, the deterioration of fiscal conditions in major European economies and political uncertainty led to a sharp rise in European bond yields, triggering a global debt trust crisis, resulting in a substantial sell-off of long-term U.S. Treasuries that day.

Last week, gold prices rose continuously, breaking through the historical high of 3600 USD/ounce during trading on Friday. The increase last week was catalyzed by a confluence of factors including expectations for interest rate cuts, a crisis of independence for the Federal Reserve, tariff uncertainties, and panic over the global debt crisis. **

Last week, oil prices weakened overall. The average price of WTI was $61.87 per barrel, down from $64.01 per barrel a week earlier. The closing price of IPE Brent crude last week was $65.67 per barrel, down from $68.12 per barrel the previous week.

In terms of news, first, the U.S. EIA monthly report showed that U.S. crude oil production rose to 13.58 million barrels per day in June, setting a new historical record and exceeding the previously released preliminary estimate by about 150,000 barrels per day. Second, eight OPEC+ member countries will consider further increasing production at a meeting on Sunday, with the market expecting crude oil supply to increase further. Third, last week's non-farm payroll data was below expectations, leading to a 100% market expectation for a rate cut by the Federal Reserve in September, increasing fears of an economic recession and limiting crude oil demand.

Last week, oil prices initially fell due to supply-side influences, and the release of employment data further exacerbated the decline due to weak demand.

Last week, copper prices fluctuated and weakened. LME copper closed at $9,897.5 per ton last week, down from $9,902.0 per ton the previous week.

First, last Tuesday, the deterioration of fiscal conditions in major European economies and political uncertainty led to a significant rise in European bond yields, driving a broad increase in commodity prices that day. Second, the U.S. manufacturing PMI for August recorded 48.7, down from 48, below the expected 49, marking six consecutive months below the expansion-contraction line. Third, last week's non-farm payroll data was below expectations, leading to a 100% market expectation for a rate cut by the Federal Reserve in September, increasing fears of an economic recession.

We believe that last week's copper market was mainly driven by U.S. economic data, with the disappointing PMI and employment data narrating a story of weak demand, thereby suppressing copper prices.

2. Internal factors: The rebound in August PMI suggests rising upstream prices, and under the support of "anti-involution" and external demand, the economy remains resilient in the third quarter.

Recently, the August PMI and CRIC real estate sales data were released. The manufacturing PMI in China rose slightly to 50.5% in August, but small and medium-sized enterprises remained below the expansion-contraction line, with insufficient demand being the main constraint; the non-manufacturing PMI rebounded to 50.3%, with expansion in the service sector and a decline in the construction sector. The sales amount of the top 100 real estate companies in August decreased by 17.6% year-on-year, but the decline narrowed, indicating an overall sluggish market, with significant declines in transaction volumes in first-tier cities, while only some leading real estate companies saw a quarter-on-quarter increase in performance. Overall, the economic data from July to August shows an uneven balance between internal and external demand, with external demand accelerating upward and internal demand continuing to slow down, ultimately leading to a decline in internal demand dominating the changes in total demand, and the fluctuations in internal demand may be related to various entities in the "anti-involution." The adjustment of expectations under the policy is related. Looking ahead, in the context of "anti-involution," the third quarter may be a critical period for policy games, and government investment expenditure may slow down. However, considering the proactive fiscal policy orientation and more timely responses this year, the risk of economic slowdown is expected to be limited. Specifically:

• In terms of PMI data, the manufacturing PMI is at 49.4%, up 0.1% from last month, halting the downward trend, but still below the boom-bust line for five consecutive months and lower than market expectations, with overall performance still weaker than seasonal trends; from the perspective of enterprise size, the PMI for large enterprises is at 50.8%, expanding for four consecutive months, with production and new order indices both higher than the manufacturing average, reflecting enhanced risk resistance. The PMI for medium-sized enterprises has fallen to 48.9%, while the PMI for small enterprises has risen to 46.6%, but remains in the contraction zone, indicating that small and medium-sized enterprises still face significant operational difficulties due to insufficient demand and cost pressures. On the demand side, new orders reported at 49.5%, a slight increase of 0.1%, still in the contraction zone, with limited recovery, and insufficient demand remains the main factor for the current PMI contraction; new export orders rose by 0.1% to 47.2%, with external and internal demand generally synchronized this month; on the supply side, the production index is at 50.8%, up 0.3 percentage points, with elasticity greater than demand and still in the expansion zone, while the employment index has fallen to 47.9%, continuing to fluctuate around the central level. On the price side, the raw material purchase price index continues to rise to 53.3%, remaining in the expansion zone for two consecutive months with an expanding increase, significantly supporting raw material prices under the anti-involution policy; the factory price has also risen to 49.1%, reaching a new high in 10 months, with industrial deflationary pressure temporarily alleviated; the non-manufacturing PMI has risen to 50.3%, 0.2 percentage points higher than last month, moving away from the lowest value of the year, still above the boom-bust line. By industry, the business activity index for the service sector has risen to 50.5%, with industries such as railway transportation, air transportation, and telecommunications broadcasting and television in a high prosperity zone, while the construction industry has been affected by high temperatures and rainy weather, with the business activity index falling to 49.1%, and the new order index also declining.
• In terms of KeLui Real Estate sales data, according to statistics from KeLui Real Estate Research, the TOP 100 real estate companies achieved a sales turnover of 207.04 billion yuan in August, a decrease of 1.9% month-on-month and a decrease of 17.6% year-on-year, narrowing by 6.7% compared to July, with the pace of decline slowing down. The cumulative sales turnover for the first eight months is 2,070.88 billion yuan, a year-on-year decrease of 13.1%, with the decline expanding by 0.6%; the transaction volume of new homes in first-tier cities decreased by 20% month-on-month and 26% year-on-year. Among them, the transaction volume of new homes in Shanghai fell by 27% month-on-month and 45% year-on-year, with the year-on-year decline nearly halved. Even with the support of new regulations on low plot ratios and high usable areas, sales in key cities are still declining, indicating insufficient market confidence; in August, 33% of the top 100 real estate companies saw month-on-month performance growth, with 21 companies experiencing a month-on-month increase greater than 30%, including Greentown China and China Overseas Land & Investment. However, the overall market is still primarily characterized by negative growth, with leading enterprises performing relatively well, while small and medium-sized real estate companies face significant pressure

3. External Factors: U.S. August Employment Data Below Expectations, September Rate Cut Almost Certain

3.1. September Rate Cut Inevitable but Federal Reserve Officials Divided, Beige Book Reveals Weakness in Industries Outside of AI

Despite Jerome Powell's unexpectedly dovish stance at the Jackson Hole meeting on August 22, the expectation for a rate cut in September has exceeded 97%. However, recent public statements from Federal Reserve officials indicate that there are still some differences among officials regarding the timing, magnitude, and subsequent path of rate cuts. Federal Reserve Governor Christopher Waller strongly supports starting rate cuts at the September meeting, arguing that the labor market could deteriorate very quickly, necessitating preemptive action to prevent a sharp decline in the job market. He anticipates multiple rate cuts within the next three to six months and believes the Federal Reserve does not need to follow a fixed pace of rate cuts. However, other officials have shown more caution. St. Louis Fed President James Bullard acknowledged the increased downside risks to the labor market but pointed out that the current policy rate is consistent with a fully employed labor market and inflation still above target. He expects the impact of tariffs on inflation to become evident in the next two to three quarters. Atlanta Fed President Raphael Bostic is cautious about rate cuts, suggesting that there may only be one cut this year and emphasizing that price stability remains the Federal Reserve's primary concern. Minneapolis Fed President Neel Kashkari stressed that "the inflation mission is not complete," while Cleveland Fed President Loretta Mester explicitly stated that current inflation is still too high and there is no reason to cut rates in September. New York Fed President John Williams believes that the risks to employment and inflation face a "delicate" balance, and if progress meets expectations, it would be appropriate to shift rates to a more neutral stance.

The latest Beige Book released by the Federal Reserve on September 3 shows that only four regions reported moderate growth in U.S. economic activity. Consumer spending is generally weak, as many households struggle to cope with the reality of price increases consistently outpacing wage growth. The retail and hospitality industries are attracting price-sensitive customers through promotional activities but have failed to fully offset the impact of declining international tourist demand Manufacturing activity is mixed, with some companies turning to local supply chains and increasing automation investments in response to tariffs, among which data center construction has become a highlight in commercial real estate. The overall tightness in the labor market has eased somewhat, with employment levels stable or slightly declining in most regions. Companies are hesitant to hire due to uncertain demand and are adjusting their workforce through natural attrition; at the same time, several regions emphasize that the reduction of immigrant labor is putting pressure on the construction industry. Price pressures remain widespread, with input costs rising sharply due to tariffs, but companies' ability to pass on costs to consumers is constrained by customers' high price sensitivity and intense competition, squeezing corporate profits. Overall, investment in AI-related companies remains strong, but other companies have mixed views on the outlook, generally seeing the uncertainty of trade policies and the impact of tariffs as major downside risks.

In the wake of last week's surprising non-farm payroll data, market expectations for a rate cut in September have become almost certain. However, there is a clear division within the Federal Reserve between the "preemptive" and "cautious" camps. Some Fed governors, including Waller, are concerned about sudden changes in the labor market and advocate for a preemptive and flexible rate-cutting path, while several regional Fed presidents are more focused on the stickiness of inflation and the lagging effects of tariff policies, emphasizing that it is not advisable to ease policies too early. The latest Beige Book has intensified the difficulty of this decision-making—weak economic growth, soft consumer demand, and pressure on corporate profits support the necessity of a rate cut, but the input inflation driven by tariffs and the still tight service sector inflation validate the hawkish concerns.

3.2. U.S. August Employment Data Falls Short of Expectations, September Rate Cut Almost Certain

On Friday, September 5, according to the latest data released by the U.S. Bureau of Labor Statistics, the U.S. added 22,000 non-farm jobs in August, falling short of the expected 22,000. The June data was revised down from an increase of 27,000 to a decrease of 13,000, while July data was slightly revised up to 79,000. The unemployment rate in August was 4.3%, in line with expectations and up from the previous value of 4.2%. The labor force participation rate in August rose slightly to 62.3%, up from the previous value of 62.2%. Average hourly wages in August increased by 0.3% month-on-month, consistent with the previous value of 0.3% and in line with expectations.

From a sectoral perspective, employment in goods manufacturing was cut by 25,000, with manufacturing cutting 12,000 jobs, construction cutting 7,000, and mining cutting 6,000. Private service employment added 63,000 jobs, mainly contributed by education and health services, and leisure and hospitality, which grew by 46,000 and 28,000, respectively. Government employment saw a reduction of 16,000 jobs On September 4th, last Thursday, the ADP Research Institute, in collaboration with the Stanford Digital Economy Lab, released data showing that U.S. ADP employment increased by 54,000 in August, below the expected increase of 68,000 and the previous value of 104,000. In detail, the goods manufacturing sector grew by 13,000, with manufacturing cutting 7,000, construction increasing by 16,000, and mining growing by 4,000. The service sector grew by 42,000, with leisure and hospitality rising by 50,000, which is the biggest driver of ADP employment.

This month's non-farm employment data fell short of expectations, with the unemployment rate rising to 4.3%, reflecting the weekly increase in initial jobless claims since the central bank's annual meeting. Currently, the CME has fully priced in a rate cut by the Federal Reserve in September, with the probability of a 50bp cut rising to 14%. We believe that the market is overly pessimistic about the current data and lacks rationality. Upon closer inspection, the unemployment rate, which the Federal Reserve pays more attention to, has not yet reached the Sam Rule. Additionally, the labor participation rate and average wage growth in August remain stable, and the weakness in non-farm employment alone may not support an unexpected rate cut. Considering that historically, tariffs have a lag effect of about three months on inflation, the fully implemented reciprocal tariffs in August may be fully reflected in November. The release of the November CPI coincides with the December FOMC meeting, and if inflation stabilizes at that time, it could initiate a continuous rate cut cycle.

3.3. U.S. August ISM PMI Marginally Rebounds, New Orders Index Significantly Rises

On September 2nd, last Tuesday, ISM released the August U.S. manufacturing PMI index. The data showed that the August U.S. manufacturing PMI recorded 48.7, down from 48, and below the expected 49, marking six consecutive months below the expansion line. In terms of components, only new orders rose by 4.3 to 51.4, and the export index increased by 1.5 to 47.6, with the main drag being the output index, which fell sharply by 3.6 to 47.8. The price index also slightly adjusted down by 1.1 to 63.7 Still at historical highs.

According to the statement from the chairman of the ISM Manufacturing Business Survey Committee, the contraction rate of U.S. manufacturing activity slightly slowed in August, with the growth of new orders being the main driving factor for the rise in the manufacturing PMI index. Among the four major demand indicators, two showed improvement: the new orders index and the new export orders index both rose, while the customer inventory index and the uncompleted orders index accelerated their contraction. A customer inventory index at a low level is generally seen as a positive signal for future production activities. From the output side, the production index fell back into the contraction zone, while the employment index saw a slight increase. Survey respondents generally indicated that their companies are still focused on controlling employee numbers as the mainstream strategy, rather than expanding recruitment. Finally, the overall input factors further fell into the contraction zone. Although the inventory index showed slight improvement, it remained in a state of contraction; the supplier delivery index indicated a slowdown in delivery speed; prices continued to rise but the rate of increase narrowed; the import index fell deeper into contraction. Overall, in the manufacturing sector, the sub-sectors accounting for 69% of the industry's GDP were in a state of contraction in August (an improvement from 79% in July). Among them, the sectors contributing 4% to GDP showed deep contraction (composite PMI reading ≤ 45%), a significant improvement from 31% in July. The proportion of industry GDP with PMI ≤ 45% is an effective indicator of the overall weakness in manufacturing. Among the six major manufacturing sub-sectors, two industries (food, beverage, and tobacco products; petroleum and coal products) achieved expansion in August, while all sectors contracted in July.

On September 4th, U.S. time, ISM released the August U.S. services PMI index. The data showed that the U.S. services PMI for August recorded 52, up from 50.1, exceeding the expected 51. By sub-item, the business activity index for August was 55, up 2.4 from July. The new orders index rose 5.7 to 56.0. The employment index slightly increased from 46.4 to 46.5. The supplier delivery index fell from 51.0 to 50.3, and the price index decreased by 0.7 to 69.2. The import index rose 8.7 to 54.6, while the export index fell 0.6 to 47.3. The final value of the U.S. August Markit services PMI was 54.5, expected 55.4, initial value 55.4.

According to the statement from the chairman of the ISM Manufacturing Business Survey Committee, the August services PMI data showed stronger resilience, mainly due to the accelerated expansion of the business activity index and the new orders index. However, the continued contraction of the employment index, the uncompleted orders index hitting a 16-year low, and the price index remaining high around the 70% level offset these positive indicators. Respondents' comments again focused on the increased frequency of mentions regarding tariff impacts, and there are signs indicating that current business activity and import growth are partly due to companies taking proactive actions in response to anticipated price increases and preparing for the holiday peak season.

The ISM PMI in the U.S. for August has warmed , but manufacturing remains weaker than expected and is below the boom-bust line, while the services PMI exceeded expectations . The manufacturing PMI has been in the contraction zone for six consecutive months, and although new orders have warmed, the decline in output and high prices still highlight the deep challenges facing the industry In stark contrast, the service sector has shown strong resilience, with significant expansion in business activities and new orders. However, this expansion has not effectively translated into the employment sector, as the service employment index remains persistently sluggish, and imported inflationary pressures remain stubborn. The divergence in data indicates that the growth engine of the U.S. economy is still largely driven by the service sector, and Trump's "manufacturing revival" has yet to show signs of progress. Overall, while there are no immediate concerns for the economy, long-term worries remain.

Authors of this article: Lin Rongxiong, Zou Zhuoqing, Peng Jingtai, Source: Lin Rongxiong Strategy Salon, Original title: "[Guotou Lin Rongxiong Strategy] Water Buffalo Wagging Its Tail"

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