Last week, the A-share market managed a modest weekly gain despite a volatile mix of internal and external pressures, according to a recent analysis from Morgan Stanley Fund. The primary external drag came from renewed upward pressure on global rates after the Federal Reserve delivered a widely anticipated 25-basis-point hike. Following the decision, the dot plot shifted notably higher, pushing the 10-year U.S. Treasury yield briefly above 5% and lifting the U.S. dollar index past the 100 mark, adding strain to risk assets worldwide.
Domestically, August data painted a mixed picture: industrial production and foreign trade remained relatively resilient, while consumption and investment stayed tepid. Industrial value-added output picked up to a 5.2% year-on-year increase, with high-tech manufacturing expanding 16.7%, but retail sales of consumer goods rose only 0.4% and cumulative fixed-asset investment fell 7.2%, underscoring that the domestic demand recovery remains sluggish.
Where to start
The underlying industrial momentum remains intact, with AI hardware trends tracking overseas performance closely. Notably, historical experience suggests that equity markets can still advance on earnings momentum in the aftermath of rate hikes. That dynamic forms the basis for a cautiously optimistic stance at this juncture, even as macro uncertainties linger.
At its September meeting, the Fed raised the federal funds target range by 25 basis points to 3.75%–4.00% — the first hike since July 2023. The updated dot plot showed the median rate projection for end-2026 rising from 3.8% to 4.1%, with most officials anticipating at least one more increase this year. Since the hike itself was fully priced in, the key divergence now lies in the trajectory: market pricing suggests roughly a 50% chance of another move in October, while futures imply two to three additional hikes over the coming year, peaking near 4.5%–4.6%. The conversation has shifted from "when will cuts begin" to "how many more increases are coming."
The drivers behind longer-dated yields are also evolving. Some strategists attribute the move toward 5% partly to capital competition fueled by AI-related capital expenditure — with private-sector AI infrastructure and government financing vying for the same pool of capital, thereby pushing up the global cost of capital. Estimates suggest that net issuance of tech debt has added roughly 10 to 15 basis points to global bond yields. The duration expansion is still chiefly a function of government bonds; the situation has not spiraled out of control, but it has certainly been priced into the market.
On the earnings front, fundamentals remain constructive. Strong U.S. profit growth relative to trend has triggered debate over a potential "earnings bubble," but the current level appears cyclically elevated rather than on the verge of collapse. Valuations have already absorbed much of the adjustment, and the bulk of global equity returns continues to come from earnings growth rather than multiple expansion. Going forward, if the Fed holds steady in October and inflation recedes alongside lower oil prices, the shock to markets is more likely to be short-lived and episodic. However, if yields break decisively above 4.5%, valuation expansion across global equities could give way to a more rigorous earnings verification phase.
Why just these key areas?
External pressure appears to have largely materialized last week, and with uncertainty now reduced, markets are entering a phase of reduced sensitivity to headlines — meaning further impact on fundamentally sound sectors should be limited. Domestically, while August CPI and PPI both turned higher, inflation is not the core factor driving current market direction. Looking ahead, the fund manager is focusing on four key investment themes.
The first theme centers on AI hardware segments facing delivery capacity constraints. Optical interconnects, memory, and liquid cooling solutions are benefiting from upward revisions in overseas capital expenditure and rising contract prices. Long-term supply agreements and existing bottlenecks give these subsectors the highest earnings visibility. The second theme is domestic computing power. The competitive landscape for AI compute is evolving from single-chip performance to system-level solutions, and the scarcity of advanced packaging and high-bandwidth memory is becoming a structural rather than cyclical phenomenon.
The third area of focus is the resource chain benefiting from price increases. Copper and select chemical products stand to gain from supply constraints and a modest reflation trend. Finally, high-dividend-yield equities are worth holding as a portfolio stabilizer, providing downside protection and income support in an environment where rate expectations remain fluid. These four areas collectively aim to balance growth optionality with defensive resilience.