Summary of Key Points
The global stock markets are currently in a period of "intense critical events," with three major variables determining the short-term trend: the Federal Reserve's July interest rate meeting (which affects global funding costs, especially the valuation of tech stocks), the financial reports of AI industry giants (which test whether the AI narrative can continue and impact the profitability of individual companies), and the domestic Political Bureau meeting (which sets the tone for policies in the second half of the year and also affects the valuation of A-shares and overall profit expectations). The market is in a "bottom range but chaotic" state, with both earnings per share (EPS) and price-earnings ratios (PE) lacking systematic signs of improvement. We need to wait for the outcomes of these three events to break this deadlock.
Detailed Analysis
1. Federal Reserve Interest Rate Meeting: Market and Experts in Disagreement
The Federal Reserve is meeting these days, and market participants and economists have completely opposite views on whether interest rates will be raised:
- Market Participants (futures traders, institutions): They believe the probability of a rate hike in July is over 30% (it was only 10% two weeks ago), and the yield on 10-year U.S. Treasury bonds has risen to 4.71%—this means the cost of borrowing has increased. Tech stocks, due to their high valuations (the future earnings discounted to the present are less valuable), have already experienced a decline.
- Economists: Everyone thinks rates will not be raised, for several practical reasons: employment is cooling down, inflation data is not that severe, and raising rates would not help with supply chain issues (such as chip shortages).
Regardless of whether rates are raised or not, the key lies in the tone of the Federal Reserve Chairman. If he indicates a possibility of another hike in September (hawkish stance), U.S. bond yields will remain high, putting pressure on tech stock valuations. If he suggests no immediate hikes (dovish stance), tech stocks might see a short-term rebound, but if overall market turnover and corporate profitability do not improve, the rebound will be more of a selling opportunity than a buying one. For A-shares, foreign investors may reduce purchases due to higher interest rates, which could pressure the valuation of AI hardware sectors (such as optical modules).
2. AI Industry Giants' Financial Reports: The Future of the AI Narrative Depends on Balance Between Spending and Profitability
Recently, major AI companies (Microsoft, Meta, Amazon, SK Hynix, etc.) have released their financial reports, representing the most crucial "mid-term exam" for the AI sector this year. The focus is on two main points: whether the orders are genuine (for example, whether SK Hynix's memory chip orders are real) and whether they are profitable enough.
For instance, Google Cloud's revenue increased by 82%, but its capital expenditure (on servers and data centers) doubled, resulting in negative free cash flow, despite which its stock price still fell. Tesla also experienced a situation where it sold a lot but made little profit, with negative cash flow. Microsoft is more critical because it has a complete AI ecosystem (selling cloud computing power plus existing customers paying for AI services), but the market is concerned about its high capital expenditure (expected to be $190 billion this year, up 61% year-over-year). If the profits from AI cannot cover these costs, its stock price could decline.
If these companies all show poor performance with increased spending and negative cash flow, the previous sharp drops in AI hardware stocks might just be the beginning, and the entire industry chain will need to be revalued. Only if they can demonstrate profitability without excessive spending can the AI narrative continue.
3. Political Bureau Meeting: The "Policy Compass" for A-shares—Support or Stabilization?
The Political Bureau meeting at the end of July will set the tone for policies in the second half of the year and has the greatest impact on A-shares. Over the past three years, when economic pressure was high, policies have directly "activated" the capital market (for example, in 2023, there were efforts to "liven up the capital market," leading to a significant rise). Currently, market expectations are low because the annual growth targets are not ambitious. Therefore, policies may focus on "implementing existing measures" rather than introducing new stimulus, meaning they will aim to stabilize the market rather than drive it upward significantly.
However, lower expectations could actually create opportunities: if the meeting does not deliver unexpected negative surprises, there is a higher chance of a structural rebound. If there are unexpected positive policies (such as fiscal support), the market reaction could be more intense. Possible policy directions for A-shares include:
- Domestic Consumption: Stimulating service consumption and advancing infrastructure projects (transportation, energy, etc.).
- Risk Resolution: Addressing local debt and the situation of small and medium-sized banks, which would benefit banks and local state-owned enterprises.
- Technological Independence: Promoting domestic alternatives for semiconductor equipment and materials to continue supporting the AI sector.
These directions will directly determine the medium-term trends of the consumption, cyclical, and technology sectors.
4. What Should Ordinary Investors Do?
Investors should consider three sets of signals to choose their strategies:
- All Three Positive (dovish Fed stance + positive AI financial reports + strong domestic policies): Actively invest in North American AI chains (optical modules, server manufacturing), domestic technology (semiconductor equipment), and cyclical sectors (consumption, new infrastructure).
- Two Positives and One Negative (dovish Fed stance + supportive policies, but poor AI financial reports): Avoid overseas AI companies and focus on domestic alternatives (equipment/materials) and policy-benefited sectors (consumption/new infrastructure).
- One Positive and Two Negatives: Take a defensive approach, focusing on low-valuation, high-dividend consumer stocks (such as Moutai, Yili), and avoid tech stocks for now.
- All Negative: Hold cash, short-term bonds, or gold, and wait for panic to subside before entering the market.
Finally, although the market is volatile, extreme pessimism often indicates that a turning point is near. With patience and attention to the outcomes of these events, investors can identify the next major trend.
Conclusion
The current market's biggest characteristic is uncertainty, but by closely monitoring the signals from these three key events, ordinary investors can make informed decisions. There's no need for excessive panic; once the results of these events are known, the direction will become clear.