Non-TSMC tech stocks drive Taiwan equities higher; earnings delivery is solid, but valuations and revision momentum warrant caution

Overview

This report is Goldman Sachs' Taiwan, China Market Weekly, comprehensively tracking index and sector performance, domestic and foreign institutional fund flows, ETF subscriptions and redemptions, corporate monthly sales, second-quarter earnings, earnings forecast revisions, valuations, macro data, and the TSMC ADR premium. The report shows that non-TSMC technology sectors significantly led gains, driven by buying from foreign and local institutions, and corporate fundamentals delivered well; however, market valuations are already elevated, export growth was below expectations, and earnings upgrade momentum may also begin to weaken.

Core views

First, the market rally was clearly structural: non-TSMC semiconductors, technology hardware, materials, and capital goods led gains, while TSMC and financials lagged. Second, cash equities, funds, and ETF flows generally provided support, but foreign investors increased short positions in futures, indicating risk appetite has not improved one-directionally. Third, July sales and second-quarter earnings broadly exceeded expectations, supporting near-term earnings fundamentals; 2027 consensus EPS was also revised up by 0.8%. Fourth, the ERLI model suggests the pace of earnings upgrades may slow, and together with 12-month and 24-month forward P/E ratios above historical averages, valuation expansion is constrained. Fifth, the TSMC ADR premium rose to 15%, and the reversal index suggests the premium may narrow.

Analysis framework

The report uses a combination of market and sector return comparisons, investor-type fund-flow decomposition, ETF flow monitoring, listed-company monthly sales tracking, earnings beat ratio statistics, consensus earnings revisions, forward valuation standard-deviation positioning, and proprietary leading and reversal indicators to cross-validate the fundamentals, liquidity, valuation, and risks of the Taiwan, China equity market. The underlying data mainly comes from FactSet, TEJ, Bloomberg, MSCI, EPFR, TWSE, TAIFEX, and company disclosures.

Methodology notes

• Fundamental trackingMonthly sales tracking

  Measures recent operating momentum using disclosed companies' monthly revenue growth and quarterly expectation completion rates.

  As of the report date, approximately 50% of listed companies had disclosed July revenue; the report compares actual year-on-year growth and third-quarter consensus expectation completion rates with historical averages.

• Earnings analysisEarnings beat analysis

  Calculates the proportion of companies whose earnings and sales are above or below consensus expectations, as well as the median deviation.

  Companies that have reported second-quarter results cover approximately 74% of market capitalization; the report also compares year-on-year and quarter-on-quarter growth, as well as earnings and sales surprises.

• Earnings leading indicatorERLI earnings revision leading indicator

  Uses leading variables to assess future momentum for upward or downward earnings forecast revisions.

  Although Taiwan, China equity earnings were revised up by 6% and 13% over the past 1 month and 3 months, respectively, the ERLI model suggests the subsequent pace of earnings upgrades may slow.

• Valuation analysisForward P/E standard-deviation positioning

  Compares the current forward P/E ratio with the historical average and standard-deviation bands.

  MSCI Taiwan's 12-month and 24-month forward P/E ratios are 19.0x and 14.9x, respectively, corresponding to 1.6 and 0.8 standard deviations above historical averages.

• Relative value and trading indicatorsGSSRTSMR TSMC ADR premium reversal index

  Assesses the probability of a premium reversal based on features such as changes in the ADR premium, interest rates, volatility, relative strength, and risk sentiment.

  The TSMC ADR premium rose to 15%, up 7 percentage points in one week; the GSSRTSMR reading is +0.7, suggesting the premium may retreat or narrow.

• Factor analysisLong-short style factor monitoring

  Classifies MSCI Taiwan constituents into the highest and lowest quartiles by factor indicators and compares the performance of equal-weighted long-short portfolios.

  Factor baskets are rebalanced quarterly and used to identify changes in market style and return drivers.

Asset mapping & comparison

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

• TAIEX

  The core market benchmark of the report, with a 12-month target of 51,000 points.

  Strengths

  Sales and second-quarter earnings performance were strong, with support from institutional and ETF inflows.

  Weaknesses

  Index heavyweight TSMC and financials lagged during the week, and forward valuations are elevated.

  Comparison

  Rose 2.6% during the week, outperforming Asia Pacific ex-Japan by 1.8 percentage points.

  Risks

  Slower earnings upgrades, exports missing expectations, valuation pullback, and changes in cross-strait risk sentiment.

• TPEx

  Reflects the performance of Taiwan, China's over-the-counter market and small- and mid-cap growth stocks.

  Strengths

  The report title shows a 9% weekly gain, driven by strength in technology and growth sectors.

  Weaknesses

  Small- and mid-cap stocks are usually more sensitive to changes in liquidity and risk appetite.

  Comparison

  Gains exceeded TAIEX, reflecting significant outperformance by small- and mid-cap and non-heavyweight tech stocks.

  Risks

  Crowded trades, reversal of fund flows, and high volatility risk.

• Non-TSMC tech stocks

  The main beneficiary of this week's market rally and institutional fund allocation.

  Strengths

  Non-TSMC semiconductors rose 11%; both foreign investors and local funds were net buyers, and earnings revisions were also relatively positive.

  Weaknesses

  Valuations and positioning may have risen after the rapid gains.

  Comparison

  Significantly outperformed TSMC and financials, which fell 2% during the week.

  Risks

  Slowing pace of earnings expectation upgrades, changes in global technology demand, and profit-taking by funds.

• TSMC

  A core TAIEX heavyweight, also involving relative pricing between Taiwan common shares and U.S. ADRs.

  Strengths

  Long-term support from semiconductor and technology demand, with high market liquidity.

  Weaknesses

  The stock price fell 2% during the week, foreign investors were net sellers, and the ADR premium rose to 15%.

  Comparison

  The week's performance was clearly weaker than the non-TSMC semiconductor sector.

  Risks

  Narrowing ADR premium, valuation volatility, foreign investor selling, and geopolitical risks.

• Taiwan-themed ETFs

  Reflects retail and institutional demand for allocating to Taiwan, China equities through fund products.

  Strengths

  Net inflows reached US$2.4bn during the week, with significant inflows into both active and broad-based products.

  Weaknesses

  Some inflows came from leveraged products, which may increase sensitivity to short-term volatility.

  Comparison

  ETF inflows were larger than foreign cash equity net purchases.

  Risks

  Passive redemptions during market corrections, deleveraging, and concentration risk in holdings.

Key data

• TAIEX weekly performance+2.6%Outperformed Asia Pacific ex-Japan by 1.8 percentage points.
• TPEx performance+9%Weekly gain listed in the report title.
• Non-TSMC semiconductor performance+11%The main leading sector for the week.
• Foreign cash equity net inflowUS$300mnMainly sold TSMC, financials, and commodity-related stocks, while buying non-TSMC tech, industrials, and defensive sectors.
• Change in foreign futures short positions+US$4bnShort positions increased, showing coexistence of cash equity buying and derivatives hedging.
• Local fund net inflowUS$2.1bnFunds mainly flowed into non-TSMC tech stocks.
• Taiwan-themed ETF net inflowUS$2.4bnIncluding US$1.2bn in active products, US$1.1bn in broad-based products, and US$100mn in leveraged products.
• July listed-company revenue growth+55% YoYApproximately 50% of companies have reported, above June's 52%.
• Third-quarter revenue expectation completion rate36%Above the historical average of 32% for the same period.
• Second-quarter earnings growth+131% YoY, +29% QoQCompanies that have reported cover approximately 74% of market capitalization.
• Second-quarter earnings beat and miss ratios51% and 34%Median earnings and sales surprises were +16% and +5%, respectively.
• 2027 consensus EPS revision+0.8%Upgrades were most notable in commodities, information technology, and capital goods sectors.
• Forward P/E12-month 19.0x; 24-month 14.9xRespectively 1.6 and 0.8 standard deviations above historical averages.
• TSMC ADR premium15%Up 7 percentage points in one week, with the GSSRTSMR reversal index at +0.7.
• July export growth+32.9% YoYBelow consensus expectations of 40.6% and June's 40.3%, mainly due to weaker demand from the U.S. and ASEAN.
• July consumer price index+2.5% YoYIn line with consensus expectations; June was +2.4%.
• July manufacturing PMI55.1Slightly below June's 55.2, but still in expansion territory.
• TAIEX current level and target44,226 points; 12-month target 51,000 pointsData as of August 7, 2026, implying approximately 15.3% upside.

Impact & implications

The combination of fundamentals and fund flows remains favorable for the Taiwan, China equity market, especially non-TSMC technology, capital goods, and selected industrial sectors that are supported by institutional funds and stronger earnings revisions. At the same time, index valuations are significantly above historical averages, and future returns depend more on earnings delivery than continued valuation expansion. Foreign investors increasing cash equity holdings while expanding futures shorts, the high TSMC ADR premium, and slowing earnings upgrade momentum imply the market may continue to show structural rotation and higher volatility rather than a broad one-way rise.

Risks

• The 12-month forward P/E is 19.0x, 1.6 standard deviations above the historical average, increasing the risk of a valuation pullback.
• The ERLI model suggests earnings forecast upgrade momentum may slow, and the market needs stronger actual earnings delivery.
• July exports grew 32.9% year-on-year, below consensus expectations of 40.6%, with weaker demand from the U.S. and ASEAN.
• Foreign futures short positions increased by US$4bn, coexisting with cash equity net purchases, which may reflect hedging demand or cautious sentiment.
• The TSMC ADR premium rose to 15%, and GSSRTSMR is +0.7, indicating risk that the premium may narrow.
• Market gains were concentrated in non-TSMC tech stocks, and crowded sector positioning and profit-taking may increase volatility.
• A decline in cross-strait risk sentiment indicators may affect overseas fund allocation and market risk premiums.

What to watch

• After the remaining approximately 50% of listed companies disclose July sales, whether overall revenue growth and third-quarter expectation completion rates can remain strong.
• Whether companies that have not yet reported second-quarter earnings will continue the current 51% beat ratio.
• Whether 2027 consensus EPS revisions and the ERLI indicator confirm a slowdown in upgrade momentum.
• Whether the divergence between foreign cash equity buying and increased futures shorts widens.
• Whether institutional buying, valuations, and earnings delivery for non-TSMC tech stocks can continue to support relative performance.
• Whether the TSMC ADR premium and the GSSRTSMR reversal index trigger relative price convergence.
• Whether inflows into Taiwan-themed ETFs can persist, and whether leveraged-product flows reverse.
• Subsequent changes in exports, manufacturing PMI, inflation, and end demand from the U.S. and ASEAN.
• Whether TAIEX can advance toward the 51,000-point target against a backdrop of elevated valuations.