Over the past two weeks, both U.S. and Chinese equity markets have enjoyed a brief bull run, with benchmark indices climbing more than 4%. In the U.S., this rally was underpinned by a series of positive developments—including the passage of the “Beautiful Act,” progress on digital currency legislation, and ongoing advancements in trade negotiations. The bond market remained stable, and macroeconomic data painted a relatively optimistic picture. U.S. Q2 GDP growth reached a solid 3%.
That said, beneath the surface, signs of divergence have emerged. Tariffs are beginning to weigh on manufacturing margins, as seen in recent PMI readings and corporate earnings. Meanwhile, the non-manufacturing sector continues to expand robustly, supported by a still-resilient labor market. However, the Federal Reserve has noted that the labor market’s stability is partly due to both falling labor demand and declining labor supply—fueled by anti-immigration policies and weakening work incentives—rather than genuine strength. This suggests an underlying fragility in the jobs market.
U.S. equities saw sharp declines late this week, a correction we attribute in part to the market having priced in most of the recent good news. The growing uncertainty lies in the potential impact of fully enacted tariffs on U.S. manufacturing profits. Friday’s weaker-than-expected nonfarm payrolls report accelerated the selloff, highlighting market sensitivity to labor data.
In our view, U.S. markets may now enter a period of choppy consolidation unless the Fed opens a clear window for rate cuts. Without a dovish policy shift, sustained market stability would require a continual stream of new positive catalysts—which is a challenging trade setup. As such, we recommend trimming positions to navigate this volatile phase. Locking in prior gains and preparing for range-bound tactical trading may offer better risk-adjusted returns in the near term.
In China: A Rally Backed by Policy—But Structural Issues Remain
The recent Chinese equity rally—from 3,400 to 3,600 points—was largely driven by a series of high-level policy meetings, including the Central City Work Conference, the Central Financial and Economic Affairs Commission meeting, and the Politburo session. Both large-cap and small-cap stocks participated in the surge. Notably, this is the first time since last year that heavyweight sectors such as photovoltaics, cement, steel, power construction, and real estate—all traditional A-share large-cap segments—led the charge.
Yet China’s underlying economic problems have not been fundamentally resolved. The structural challenges arising from the contraction in the real estate sector will not be absorbed quickly. Even with strategies like traditional industry consolidation and “anti-involution” measures, industrial product prices may stabilize, but meaningful price hikes are unlikely. Thus, profit margin recovery in these sectors is inherently capped—a reality already reflected in commodity futures markets.
In equities, the sharp correction that followed the 3,600-point mark was led again by these very traditional sectors. Such dramatic reversals erode investor confidence and can stall trading activity in those segments for an extended period. We advise a timely exit from these positions.
Looking ahead, Chinese markets are also likely to enter a period of turbulence. Bank stocks may once again become crowded trades. However, the extreme divergence seen in 2024 is unlikely to repeat, thanks to the PBOC’s 2.4 trillion RMB policy toolkit providing a safety net. Nevertheless, sector differentiation will become more pronounced.
A key risk to watch: July’s PMI data came in particularly weak, suggesting that upcoming macroeconomic data may also disappoint. Investors should brace for this.
Two Black Swans on the Radar
We highlight two potential global risk events that could severely disrupt markets:
Will the U.S.-China tariff extensions be prolonged by 90 days?
Will the U.S. escalate secondary sanctions against Russia?
Either event would significantly undermine global market stability. In light of this elevated risk environment, we reiterate our recommendation to reduce exposure and prepare for continued market volatility.