How Will Warsh and the Fed's Five Working Groups Impact US Capital Markets?

US Stocks: Short-term Uncertainty Coexists with Long-term Opportunities; Clarity Emerges After Rate Hikes Conclude

After missing the window for this round of rate hikes, US stock valuations face pressure in the short term regardless of whether the Federal Reserve raises rates in September. However, in the medium to long term, the conclusion of the rate-hiking cycle is expected to release valuation pressures. Coupled with the positive stance of the "Productivity and Employment Working Group" toward AI, the AI narrative for US stocks is likely to persist over the long term. On July 29, the FOMC Meeting held rates steady for the fifth consecutive time, with three voting members supporting a 25bps hike, publicly exposing internal divisions within the Fed. The market exhibited a fragmented reaction characterized by "dovishness at the short end and hawkishness at the long end." Rising inflation expectations suppressed the US dollar and provided a window for the Japanese Ministry of Finance to intervene in the foreign exchange market. The high growth rate of CSP cloud business has alleviated concerns about the sustainability of the triple capital expenditures in AI to some extent. In the short term, interest-rate-sensitive industries, high-valuation low-growth sectors, and small-cap stocks are under pressure. The next window for a shift in liquidity expectations should focus on the Jackson Hole Symposium at the end of August or the September monetary policy meeting.

Hong Kong Stocks: Capital Inflow Trend Expected to Continue; Maintain Barbell Allocation Strategy

We believe that the Hong Kong stock market possesses the conditions to continuously absorb the switching of global momentum trading, and the trend of capital inflows is expected to continue. We recommend maintaining a Barbell Strategy: First, in a market environment where volatility remains relatively high, we suggest focusing on dividend strategies, particularly "quasi-bond" sectors such as telecommunications, property management, electricity, and utilities. Second, we recommend paying attention to industries such as robotics and biotechnology, which are being jointly increased in allocation by foreign investors and Southbound funds, as well as directions such as technology hardware and AI applications, which have undergone sufficient corrections and continue to see increased allocation from foreign investors.

FOMC Holds Steady but Internal Divisions Go Public: Three Logics Behind the Fragmented Reaction in US Capital Markets

1. Bond vigilantes are dissatisfied with the Federal Reserve's delay in raising rates, intending to force a rate hike by selling off long-term US Treasuries. Inflation expectations have further risen; on July 29, the 5-year breakeven inflation rate jumped by 8bps, and the Treasury yield curve steepened significantly;
2. Rising inflation expectations suppressed the US dollar exchange rate, providing an opportunity for the Japanese Ministry of Finance to intervene in the forex market on July 30. Historically, intervention itself does not mechanically cause a crash in US stocks, but if the rapid appreciation of the yen triggers the unwinding of carry trades, high-valuation tech stocks and semiconductor stocks may still face phase-based pressure;
3. Structural differentiation in US stocks remains significant. The decline in the late session on July 29 was concentrated in sectors with the highest weighting of internet and technology stocks, while HALO assets and defensive sectors stabilized near the close, reflecting capital rotation amidst the continued reversal of AI infrastructure trading.

Short-term Monetary Policy Places US Stocks in a Dilemma; Valuation Pressure Exists Regardless of a September Rate Hike

If rates are not raised in September, oil reserve replenishment, price increases for new Apple products, and potential Section 301 tariffs could drive secondary inflation, keeping long-term interest rates at high levels. If rates are raised in September, since the implied probability of a September hike priced in by the market has fallen from 62% to approximately 57%, it could instead become an unexpected event triggering short-term turmoil. Historical experience shows that the uncertainty phase at the beginning of a rate-hiking cycle (rather than the hike itself) has the greatest impact on capital flows. The liquidity situation for US stocks has continued to weaken since July. US equity funds saw net outflows for two consecutive weeks in mid-to-late July, and semiconductor ETFs saw outflows of approximately $6.5 billion this week. Referencing historical rotation patterns during the hawkish maintenance phase, capital initially tends to flow into consumer staples, healthcare, and utilities. After the divergence in interest rate paths converges, capital is expected to flow back into financials, industrials, and high-quality tech sectors.

AI Sector: Short-term Uncertainty Coexists with Long-term Opportunities; Clarity Emerges After Rate Hikes Conclude

In the short term, overall Q2 earnings are positive but "may struggle to support the market alone." Among S&P 500 companies that have disclosed results, 66% exceeded earnings expectations, with Information Technology earnings up 57% year-on-year. However, this includes non-recurring contributions such as unrealized gains from equity investments. The high growth rate of cloud business has alleviated concerns about the sustainability of AI's triple capital expenditures to some extent. However, against the backdrop of an expected slowdown in the sequential growth rate of subsequent capital expenditures, earnings alone are difficult to sustain a continuous rebound in US stocks. In the medium term, if rate hikes conclude and push inflation rapidly back to the 2% target, long-term interest rates will decline, and the yield curve will bull-flatten. US stocks may return to a double boost from both earnings and valuation, moving away from the "earnings-driven + valuation compression" dynamic. In the long term, all three advisors of the "Productivity and Employment Working Group" hold positive attitudes toward AI, suggesting the AI narrative is likely to persist. If Hyperscaler CAPEX financing encounters difficulties, the Fed may not rule out policy support, and the decline in long-term interest rates will also reduce their medium-to-long-term financing costs.

Accelerated Inflow of Foreign Capital Since Late July Is the Core Marginal Increment Driving This Round of Hong Kong Stock Gains

Since late July, the Hong Kong stock market has shown structural divergence: Since July 23, Southbound funds have continued to flow out of the Hong Kong market, yet the Hang Seng Composite Index rose 3.7% last week, significantly outperforming major global indices. This essentially reflects that the phased switch in marginal pricing power in the Hong Kong market is continuing—Southbound funds have shifted from being the "dominant force" in the Hong Kong market from 2025 to the first half of 2026 to engaging in "structural position adjustments," while foreign capital has shifted from continuous outflows to continuous inflows since the second quarter of 2026. According to our calculations, since late July 2026, foreign capital inflows into the Hong Kong stock market have exceeded HK$35 billion, becoming the core marginal increment driving this round of gains in Hong Kong stocks. EPFR data also shows that active funds increased their allocation to the Hong Kong market by $31 million this week, further verifying that against the backdrop of high volatility in the Japanese and Korean markets, Hong Kong stocks are becoming the main beneficiary direction of this round of global capital rebalancing. By industry, since July, foreign capital has mainly increased allocations to hard technology and other directions while reducing allocations to raw materials and other directions; Southbound funds have mainly increased allocations to raw materials, healthcare, and other directions while reducing allocations to hard technology and other directions.

Investment Advice: Capital Inflow Trend in Hong Kong Stocks Expected to Continue; Adhere to Barbell Allocation Strategy

We believe that the Hong Kong stock market possesses the conditions to continuously absorb the switching of global momentum trading, and the trend of capital inflows is expected to continue. We recommend adhering to the Barbell Strategy: First, in a market environment where volatility remains relatively high, we suggest focusing on dividend strategies, particularly "quasi-bond" sectors such as telecommunications, property management, electricity, and utilities. Second, we recommend paying attention to industries such as robotics and biotechnology, which are being jointly increased in allocation by foreign investors and Southbound funds, as well as directions such as technology hardware and AI applications, which have undergone sufficient corrections and continue to see increased allocation from foreign investors.

Market risks exist; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investors bear full responsibility for decisions made based on this content.