A policy floor is emerging after the tech sell-off, and the second-quarter earnings season may reignite China's AI and manufacturing themes

Overview

This report is a China equity strategy and second-quarter earnings preview. The core view is that the AI-led sell-off in domestic technology stocks has already triggered policy support signals, while ETF flows and buyback data have also improved. Combined with expectations for global AI capex and semiconductor earnings upgrades, China's AI ecosystem may regain relative performance during the earnings season in the near term. However, the report also emphasizes that for Chinese equities to achieve a more sustainable rebalancing, stronger support is still needed from non-AI sectors and domestic-demand fundamentals, and this condition remains limited at present.

Core views

The report's main themes include three points: first, a policy floor and improved liquidity provide a healthier price foundation for AI and technology trading; second, 2Q26 earnings expectations are broadly achievable, with materials, information technology, industrials, and non-bank financials more likely to see upgrades; third, real estate, traditional infrastructure, broad consumer, and some consumer goods with sticky cost structures remain under pressure. The report recommends focusing on industries and stocks with clear earnings-upgrade paths and visible margin improvement, while remaining cautious on sectors with slowing revenue and limited room for cost decline.

Analysis framework

The report assesses tactical market opportunities and sector earnings divergence by combining indicators such as policy events, ETF flows, A-share buybacks, margin trading, deleveraging in Korean leveraged ETFs, sector EPS consensus expectations, industrial enterprise profits, capacity utilization, real estate sales, revenue and profits in consumer industries, A-share turnover, IPO financing, and the share of positive earnings pre-announcements.

Methodology notes

• Strategy frameworkPolicy floor and fund flow validation

  Use policy-driven purchases, ETF inflows, buybacks, and changes in margin trading to verify whether the market has entered a stage of policy support and position rebuilding.

  The report combines signals such as increased holdings by state-owned capital platforms, inflows back into benchmark and technology ETFs, A-share buybacks rising to yearly highs, and normalization in margin-buying ratios, concluding that the pricing and positioning environment has improved after the technology sell-off.

• Earnings framework2Q26 EPS consensus expectations and sector divergence

  Identify sectors with potential upgrades and downgrades through sector-level year-over-year EPS expectations for MXCN and CSI-300, the proportion of earnings pre-announcements, and margin trends.

  The report believes the overall 2Q26 earnings hurdle is achievable, but sector divergence is clear: IT, industrials, materials, and non-bank financials have greater upgrade potential, while consumer and the real estate chain remain the main drags.

• Thematic frameworkAI reinvestment cycle

  Differentiate between the revenue and long-term optionality brought by AI and the short-term margin dilution from capex, depreciation, and reinvestment.

  Internet companies may see improving revenue but flat earnings, not because of a traditional earnings downgrade cycle, but because accelerated AI investment is compressing short-term profits.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China's AI ecosystem and information technology

  The report's primary tactical and structural opportunity direction.

  Strengths

  Global AI capex, domestic AI infrastructure buildout, a high ratio of positive pre-announcements in semiconductor equipment, and possible 2H guidance may jointly support earnings upgrades.

  Weaknesses

  Earlier crowded positioning and deleveraging show the sector has high volatility, and in the short term it still depends on validation from global tech earnings and capex.

  Comparison

  Compared with non-AI and domestic-demand sectors, the AI supply chain has stronger earnings visibility and greater upgrade elasticity.

  Risks

  If global hyperscaler capex falls short of expectations, or if AI-related reinvestment fails to convert into profits, valuation rerating may be hindered.

• Industrials and advanced manufacturing

  The report lists this as the second category of assets likely to outperform.

  Strengths

  Industrial profit growth is exceeding revenue growth, while machinery, high-end equipment, and defense order conversion are improving, and capacity utilization is at a historically high percentile.

  Weaknesses

  It remains affected by macro demand, exports, and capex cycles.

  Comparison

  Compared with traditional infrastructure and the real estate chain, margin improvement in advanced manufacturing is clearer.

  Risks

  Order conversion may disappoint, external demand may fluctuate, or price competition may intensify.

• Financials and non-bank financials

  A beneficiary direction of capital market recovery.

  Strengths

  Average daily A-share turnover has doubled year over year, margin balances are expanding, and the IPO pace is accelerating, benefiting both brokers and insurers through investment income.

  Weaknesses

  Earnings elasticity depends heavily on market activity and risk appetite.

  Comparison

  Compared with banks, brokers and insurers have higher operating leverage to a rebound in equity markets.

  Risks

  If turnover declines, IPOs slow, or the equity market falls again, the earnings rebound may weaken.

• Real estate and downstream post-cycle chain

  The report explicitly lists this as a direction likely to underperform.

  Strengths

  Policy easing may provide phased valuation support.

  Weaknesses

  Commercial home sales in 30 cities are still contracting year over year, while demand for building materials, home appliances, and furniture remains under pressure, and rising raw material costs further compress profits.

  Comparison

  Compared with AI, industrials, and financials, the real estate chain lacks a foundation for earnings upgrades.

  Risks

  Sales may fail to show a turning point, the loss-making area may widen, and credit risk and balance-sheet pressure may persist.

• Consumer and autos

  A sector the report recommends approaching cautiously.

  Strengths

  Some leading companies may have resilience in brand and distribution channels.

  Weaknesses

  As the high base from trade-in subsidies fades, profits in autos, home appliances, durables, and some staples are under pressure.

  Comparison

  Compared with manufacturing and technology, the consumer sector has weaker revenue momentum and margin recovery.

  Risks

  A combination of slowing demand and sticky costs may cause earnings to continue missing expectations.

Key data

• Scale of policy-driven purchases约人民币600亿元China Reform Holdings and China Chengtong announced purchases of domestic equities and ETFs and said they would continue to increase holdings.
• MXCN 2Q26 consensus EPS year-over-year growth2.8%The report believes this earnings hurdle is broadly achievable.
• CSI-300 2Q26 consensus EPS year-over-year growth15.7%The report believes it can be achieved without significant downward revisions.
• CSI-300 IT sector 2Q expected EPS year-over-year growth72%Driven by global AI capex, domestic AI infrastructure, and earnings in the electronics supply chain.
• Positive earnings pre-announcement ratio for semiconductor equipment70.0%This shows semiconductor equipment stands out within the technology hardware ecosystem.
• CSI-300 industrials sector 2Q expected EPS year-over-year growth10.6%Machinery, high-end equipment, and defense order conversion support improving industrial profits.
• Positive earnings pre-announcement ratio for machinery industry85.7%The report believes this shows industrial improvement is broader rather than driven by a few companies.
• Positive earnings pre-announcement ratio for electrical equipment industry69.8%Mutually confirms the strength of the advanced manufacturing chain.
• Financials sector full-year 2026 expected EPS year-over-year growth31.6%Higher capital market activity and operating leverage are driving a rebound in financial earnings.
• Materials sector 2Q CSI-300 expected EPS year-over-year growth72.4%Supported by stable commodity prices and supply discipline.
• Year-over-year operating profit in the furniture industry in the first five months-59%Demand pressure in real estate-related downstream sectors remains significant.
• Year-over-year operating profit in the auto industry in the first five months-20%After the fadeout of last year's high base from trade-in subsidies, auto sales and earnings are under pressure.
• MXCN year-end base target100The report maintains the base target for end-2026.
• CSI-300 year-end base target5,200The report maintains the base target for end-2026.

Impact & implications

The investment implication is that in the near term, investors can refocus on earnings-upgrade themes such as China's AI ecosystem, technology hardware, semiconductor equipment, advanced manufacturing, materials, and non-bank financials; however, at the portfolio level, policy support should not be equated directly with a broad bull market, because domestic demand, consumer, and the real estate chain have not yet shown clear fundamental turning points. For internet companies, the short-term profit dilution from AI investment should be assessed separately from the long-term optionality in cloud and AI.

Risks

• Insufficient fundamental support from non-AI and domestic-demand sectors may limit the sustained rebalancing of the Chinese equity market.
• If the AI theme becomes crowded again or expectations for global AI capex are revised down, the rebound in tech stocks may be difficult to sustain.
• Real estate sales have not shown a clear turning point and may continue to weigh on building materials, home appliances, furniture, and related upstream industries.
• The consumer sector remains exposed to earnings downgrade risk due to high bases, slowing revenue, and sticky cost structures.
• If policy support is weaker than expected, or if incremental policy力度 after the July Politburo meeting is insufficient, market risk appetite may fall back.

What to watch

• Whether new policy support will be introduced after the July Politburo meeting.
• Whether June economic activity data and third-quarter growth momentum remain weak.
• 2Q26 results of global hyperscalers and capex guidance for the next 4 to 6 quarters.
• Whether 2Q results and 2H guidance from companies in China's AI ecosystem exceed expectations.
• Whether A-share ETF flows, STAR 50 and STAR Chip ETF flows, and listed company buybacks continue.
• Whether the ratio of A-share margin buying and the deleveraging progress of regional leveraged products continue to normalize.
• Whether real estate sales in 30 cities, revenue and profits in consumer industries, and auto sales show genuine turning points.