Since the start of this year, the A-share market has experienced multiple style rotations and considerable volatility. In the third quarter especially, growth sectors pulled back sharply after earlier gains. Following July, technology sectors including electronics and communications saw significant corrections after strong prior advances, while dividend and pharmaceutical sectors that had already adjusted sufficiently in the first half showed relative strength during this downward move.
Looking at the current position, what are the prospects for the A-share market in the fourth quarter? Which segment opportunities deserve attention? What risks and uncertainties remain on the horizon? Insights from four public fund investment leaders shape this analysis of the quarter ahead.
Where the market may head
The third quarter presented the most challenging investment conditions since September 2024. Looking ahead, several factors may support stabilisation. First, with the Federal Reserve's rate decision now delivered, near-term concerns over US credit conditions and upward pressure on Treasury yields may ease. Second, the technology trend remains intact, potentially refocusing attention on areas with confirmed earnings and industry momentum. Third, while domestic economic pressure persisted in the third quarter, its marginal impact on equity markets may diminish even if it continues into the fourth quarter.
Fundamentally, the recent pullback largely reflects valuation compression and shifts in market sentiment rather than a fundamental reversal in corporate earnings trends. Excluding financials and the three major oil companies, A-share earnings growth has actually improved relative to initial expectations for the year, indicating earnings remain in a recovery phase. With the Shanghai Composite Index near 3800 points, close to the lower bound of its past-year trading range, the market's downside protection has improved. Systemic downside risk appears limited, and the rapid third-quarter correction has released some valuation pressure.
From the fourth quarter through the period around the Chinese New Year, opportunities may still outweigh risks. However, a broad-based rally seems unlikely, and structural characteristics may remain prominent. After the value sector completed a valuation repair from July to August, if fundamentals in banking, consumer, baijiu, and oil and petrochemical sectors fail to improve further, the momentum for continued outsized value outperformance may be limited. In contrast, some growth and technology sectors have seen valuations return to more reasonable levels after adjustments. Supported by industry fundamentals and earnings growth, growth style may regain dominance before year-end.
Recent overseas macro disturbances have increased. The Fed rate decision is delivered, geopolitical conflicts remain recurrent, and oil prices have risen. Yet US technology assets have shown resilience. The relative weakness in domestic markets likely relates more to micro-level trading structures and changes in risk appetite, while the AI industry trend itself has not shown obvious reversal. Domestically, the economy continues to display structural divergence. Industrial production, retail sales, and fixed asset investment data appear marginally weak. PPI continues to decline, and industrial enterprise profit growth has slowed. Exports still grow, though growth may ease in the second half as the base rises. Policy continues to emphasise accelerating fiscal expenditure, and August PMI performed better than seasonal norms. Whether economic data can sustain improvement needs further observation. At the industry level, cloud vendor spending, computing power, and optical communications remain worth tracking. Additionally, while earlier events impacted market risk appetite, the adjustment in tech assets and reduced trading crowding suggest market sentiment is showing signs of marginal repair.
The third quarter saw the A-share market present a pattern of volatile adjustment and structural divergence. The recent shift in sector strength likely represents periodic valuation rebalancing and position restructuring within a range-bound market rather than a reversal of industry trends. Within technology, the AI industry continues to iterate and evolve. The national commitment to developing advanced manufacturing sectors such as semiconductors and high-end equipment remains intact. The third-quarter correction reflects risk release and expectation adjustment after crowded trading and valuation overextension. Looking ahead, market style may gradually move toward balance. As tech valuations absorb fully and low-positioned sectors complete their repairs, market attention should return to industry prosperity trends, company quality, earnings growth, and valuation fundamentals.
Segment focus for the fourth quarter
In terms of direction, the focus remains on sectors with confirmed industry fundamentals and earnings visibility, primarily in hardware including both overseas and domestic computing power. Given the transitional nature of the fourth quarter, attention also turns to areas with potential for fundamental reversal next year, including defence, pharmaceuticals, and AI applications. While clear inflection points in domestic demand cyclical sectors are not yet visible, close tracking of sub-sector changes continues.
Preference lies with technology growth areas that have clear industry trends, order or revenue support, and the potential to enter earnings delivery phases. The AI computing power chain remains the focus. Overseas AI computing power offers relatively higher certainty. Global cloud vendors maintain rapid growth in AI capital expenditure, transmitting demand through servers, optical modules, and PCBs. After adjustments from July to August, valuation pressure at some core companies has eased, while order and earnings trends have not shown clear turning points, leaving these areas worth attention. On domestic computing power, memory and related semiconductor equipment deserve more immediate focus. Domestic AI chips have substantial long-term space, but short-term performance remains influenced by HBM supply and earnings delivery pace. In comparison, the fundamentals for memory prosperity and semiconductor equipment localisation are clearer. If supply constraints ease and orders convert to revenue next year, domestic AI chips may present new investment opportunities. AI applications could become an important area, including on-device AI, intelligent driving, humanoid robots, and AI transformation at internet platforms. However, business models and earnings turning points at most application companies are not yet sufficiently clear. The stance is optimistic long-term, but currently requires waiting for user growth, revenue quality, and profit delivery rather than investing on thematic expectations alone. Across broader industry trends, new energy, power batteries, advanced manufacturing, and innovative drugs may also present structural opportunities, though supply-demand improvement, earnings turning points, and valuation levels need careful assessment.
Over the long term, China's economy will remain in a stage of structural optimisation and innovation-driven high-quality development. New economy areas including AI technology, advanced manufacturing, and innovative drugs remain strongly supported by policy, with broad long-term prospects and significant growth space. Following the recent share price correction and risk release, some quality companies now offer favourable investment value. Certain consumer and dividend sector companies possess solid free cash flow and attractive dividend yields. After extended adjustments, share prices sit in lower ranges, pessimistic sentiment is largely priced in, and potential for expectation repair exists.
Current macro liquidity faces certain constraints, and markets may continue experiencing short-term volatility. However, medium-to-long-term industry trends have not changed fundamentally. On allocation, continue tracking core assets with clear industry trends that increasingly show safety margin after adjustments. Meanwhile, watch for opportunities from potential improvements in macro liquidity expectations, strengthen comparison of distressed-reversal assets, and seek varieties with fundamental improvement elasticity.
Key risks and uncertainties ahead
Three risk areas warrant attention. First, if the US-Iran conflict remains unresolved, the possibility of further outsized Fed rate hikes exists. Second, the pace of several large model company IPOs in the fourth quarter may be monitored for potential liquidity impact on markets. Third, within the AI industry trend, cloud vendor cash flow, capital expenditure, EBITDA, and data centre construction progress are key indicators requiring close observation.
Two primary risks deserve attention. First, oil price upside risk from geopolitical conflict. Current external tensions remain elevated. Should conflict escalate or spill over to major oil-producing regions, crude supply would face significant disruption, potentially driving oil prices higher than expected. Oil is a critical variable in global inflation. Significant increases transmit through transportation, chemicals, and other supply chains to core goods prices, potentially interrupting the US disinflation process or even triggering a temporary rebound. This would directly affect Fed policy pacing. If rate cut expectations cool and easing is postponed, combined with fiscal deficit pressure from high oil prices, long-end US Treasury yields would likely remain elevated or rise further. Persistently high 10-year yields could raise global discount rates, pressure growth valuations, and intensify capital outflows and currency volatility in emerging markets, creating systemic pressure on global risk assets. Second, as AI model capabilities advance, concerns over potential threats to human security may intensify, potentially slowing or delaying frontier model training and release timelines, thereby affecting the AI industry development trajectory. Slower model iteration would weaken market confidence in large-scale AI application deployment and commercial monetisation, pressuring earnings delivery and valuation support at related companies. Overall, the stance on markets and technology trends remains relatively positive, while acknowledging the high volatility characteristics of growth sectors. Portfolio management will continue adhering to "industry trends plus fundamental verification," tracking industry fundamentals, corporate earnings, valuations, and trading crowding while maintaining room for dynamic adjustment.
Externally, geopolitical situations may remain recurrent and uncertain, potentially pushing up commodity prices. Trade barriers and supply chain access restrictions imposed by some countries disrupt the original global division of labour system, and trade frictions may intensify. The domestic economy remains in structural transformation. Based on data including retail sales and consumer confidence indices, domestic demand recovery is relatively gradual, and overall market risk appetite may struggle to sustain uptrends. Approaching year-end, some funds may seek profit-taking, and market conditions likely remain dominated by existing capital rotation. In this environment, sectors or individual stocks with high institutional concentration and elevated valuations face adjustment risk if marginal industry positives slow or third-quarter results disappoint expectations.
Attention also remains on the Fed's subsequent policy path and expectation changes, recurrent geopolitical conflicts and oil price movements, domestic economic structural divergence and subsequent data improvements, AI industry trends, and changes in overseas AI capital expenditure.