The September Federal Reserve meeting is set to reveal its rate decision, a moment that has many investors on edge. However, as previously analyzed, once the uncertainty clears, it could mark the end of negative news and potentially trigger a powerful rebound. With just hours until the official announcement, the market has already staged a significant rally today, breaking away from its recent decline, suggesting that whether the Fed hikes or holds, much of the risk has been priced in during the prior sell-off.
Current probabilities from major US institutions place the chance of a September rate hike above 90%. This expectation is fueled by August's core CPI data surpassing forecasts and the Personal Consumption Expenditures (PCE) index also beating expectations. While the Fed's dual mandate includes maximum employment, the fight against inflation remains the primary focus. Although non-farm payroll data is not stellar, it hasn't deteriorated drastically, whereas inflationary pressures are mounting, exacerbated by ongoing Middle East tensions and a blocked Strait of Hormuz, which has driven international oil prices near $110 per barrel, elevating global inflation levels.
President Trump has voiced opposition to a rate hike at this juncture, concerned it could pressure US equities and negatively impact his party's prospects in the November midterm elections. In a hawkish signal at the recent Jackson Hole symposium, Fed Chair Warsh reiterated the commitment to achieving the 2% inflation target without compromise. Whether this translates into an actual hike or a surprise pause remains uncertain, but the meeting's outcome will remove the ambiguity that has weighed on markets, which is beneficial for stability and a potential rebound.
Following a challenging third quarter, many tech leaders have corrected to more attractive valuations, suggesting the deleveraging process may be nearing its end. In May and June, when retail enthusiasm for AI stocks peaked, the advice was to curb greed, trim positions by half, and diversify with a "one hand tech, one hand dividend" strategy, which helped many avoid the sharp tech sell-off in July. Now that the index appears to be testing the lower bound of its trading range, it's time to overcome fear and selectively accumulate oversold tech or quality blue-chip stocks in preparation for the fourth quarter. After the National Day holiday, a year-end rally could unfold, offering recovery opportunities for those who suffered losses earlier.
Maintaining confidence and patience is crucial. Today's rebound signals that investor sentiment is gradually healing, and the market's decline has spotlighted its value, laying a foundation for a potentially positive fourth quarter. If the Fed raises rates by 25 basis points, the federal funds rate would move to 3.75%-4%, potentially lifting Treasury yields and attracting capital away from emerging markets, impacting their performance. Moreover, as the world's central bank, a Fed hike could introduce currency volatility. The yuan has appreciated notably recently; a hike might exert some depreciation pressure. However, the People's Bank of China is unlikely to follow suit, given that August's economic data showed modest growth, necessitating a low-rate, ample-liquidity environment to support recovery. Thus, the impact on A-shares should be relatively contained, especially after extensive prior adjustments. As often noted, risk is born from rises and opportunity from falls; after a significant correction, A-shares may stage a robust rebound, so investors should remain objective rather than pessimistic.
Oil, the lifeblood of industry, at persistently high levels, stokes global inflation and pushes bond yields higher, as central banks like the ECB and BOJ have already hiked to counter price pressures. High oil and high rates are detrimental to global economic recovery and can suppress capital market performance. Rising US Treasury yields also reflect concerns over the US government's total debt surpassing $40 trillion, with annual interest payments now exceeding $1.3 trillion, over 20% of fiscal revenue, raising worries about default risk. Textbook theories treat the 10-year Treasury yield as the risk-free benchmark, but at nearly 5%, it now includes a substantial risk premium, indicating market anxiety.
For US equities, higher yields don't necessarily spell a bear market; the trajectory depends on multiple factors, including AI capital expenditure sustainability, tech giants' earnings delivery, and global capital flows. Predicting the timing of a tech bubble burst is futile, but vigilance is essential. A daily habit of checking overnight US market performance is advisable; if the Nasdaq falls over 5% in a day, trimming exposure may be prudent, and a crash scenario might warrant full de-risking, given the Nasdaq's leadership role in global tech sentiment.
The third-quarter correction was a healthy recalibration of excessive tech speculation in the first half. The deleveraging phase may be concluding, paving the way for a valuation-repair rally in Q4. However, replicating the first half's AI surge seems unlikely, as investors need time to rebuild confidence. A more probable scenario is a volatile rebound that gradually restores sentiment, with sector rotation rather than AI dominance.
Despite some pundits calling for a bear market during the recent decline, this view was contested. The correction was a normalization process, and once complete, the market should resume its gradual long-term uptrend, albeit at a slower pace and with extended duration. Sector rotation will be key in Q4. Chip and computing power leaders, now backed by earnings, may rally first, followed by opportunities in humanoid robots, commercial aerospace, solid-state batteries, and innovative drugs. Quality traditional blue-chips could also see valuation recoveries, making the "one hand tech, one hand dividend" barbell strategy effective for navigating this rotation.
Recent disclosures at the World Lung Cancer Conference highlighted promising clinical data for domestic innovative drugs, showcasing China's R&D strengths, particularly in oncology, where it holds a global edge. In the first half, Chinese companies accounted for roughly eight of the top ten global innovative drug BD deals, reflecting technological leadership and cost advantages from an engineering dividend. Chinese innovative drugs may become a global R&D hub, with out-licensing deals offering substantial growth prospects. After a surge in July and a pullback in August-September, a new rebound opportunity may emerge. The core logic for future gains will hinge on orders and earnings, with a focus on leaders in CXO and related fields.
The recent property sector policies aim to stabilize the real estate market and prevent further erosion of household wealth, boosting confidence and consumption, though their effects are yet to be seen. The housing market remains in adjustment, with clear divergence ahead. Core properties in first- and second-tier cities, supported by scarcity and demand, may see initial rebounds, while oversupplied areas in third- and fourth-tier cities could continue to decline without a clear inflection point. These policies may release some new demand and mitigate downside risks, but over-optimism on property stocks is unwarranted, given population decline and persistent oversupply. With development investment down for three straight years and many developers facing liquidity strains, significant improvement is unlikely, necessitating cautious investment approaches.