Over the past three weeks, as key global economic data has been released, both the U.S. and China have exhibited signs of labor market weakness. Yet equity markets, fueled by technological progress, have surged to new highs.
In China, while no fresh nationwide employment figures have been released, the jobless rate among 16–24 year olds continues to hit record highs, underscoring the difficulties faced by recent graduates. In the U.S., nonfarm payroll growth has been declining sharply, far below market expectations. At the same time, capital expenditures related to artificial intelligence have been accelerating rapidly across both the U.S. and China. The disruptive impact of AI on labor markets is only beginning to unfold, with AI Agents expected to further exacerbate job displacement.
This dynamic has created an unusual imbalance: weak labor markets alongside inflated equity valuations. In the short term, the efficiency of new investment in generating jobs has diminished, while AI’s actual profitability has yet to meet lofty expectations. The underlying driver of this employment-weak, valuation-high equilibrium lies in fiscal competition at the global level.
From the U.S. to China, fiscal discipline has effectively broken down. U.S. government debt has surged, while China’s central fiscal deficit ratio has also expanded under the weight of macro adjustments. Similar fiscal strains have fueled unrest in France, Nepal, Indonesia, and Argentina. Economies that have attempted to apply fiscal brakes have faced acute political instability. Correspondingly, global gold prices have climbed 40%. As long as competitive fiscal policies persist and currency markets remain stable, the balance of weak jobs and high equity valuations is unlikely to be disrupted. With the U.S. dollar index recently retreating, we expect further declines could trigger other economies to adopt looser macro policies.
U.S. Outlook: Stagflation Risks and the FOMC
U.S. equity indices remain guided by stagflation risks. Key indicators—including nonfarm payrolls, unemployment, PPI, and CPI—point to a mild stagflation scenario. The U.S. economy’s capacity to generate jobs is gradually weakening, which has slowed equity market momentum and introduced modest volatility.
The upcoming September FOMC meeting is critical. Market consensus anticipates a 25bp rate cut. We expect that once delivered, markets may stage a short rebound before re-entering a consolidation phase. As this is a quarterly meeting, the Summary of Economic Projections (SEP) will be released, and the dot plot for policy rates over the next 12 months will be pivotal. Even Powell’s opening remarks could trigger outsized market swings.
Some policymakers believe the neutral rate is around 3%, implying roughly 150bp of rate cut space from current levels. Relative to CPI and PPI trends, policy remains somewhat restrictive, sufficient to anchor long-term inflation expectations. However, whether 150bp of easing can meaningfully reverse labor market weakness remains doubtful—particularly given AI’s structural impact on employment.
Sector-wise, interest rate–sensitive industries have rallied sharply. Real estate has been a standout, while Nvidia has shown relative weakness in GPUs, pressured by competition from China. In the broader AI boom, Hong Kong equities and TSMC have emerged as new leaders. Robotics-related momentum has buoyed Tesla, and in a rate-cut cycle, these sectors should remain favorable. We also favor select U.S. small-cap segments with strong earnings and low valuations.
China Outlook: Sentiment, Technology, and Risks
China’s major indices have been driven by market sentiment and technological progress. The September 3 military parade proved to be a turning point: index highs and trading volume peaks coincided with the event, after which sentiment cooled and markets transitioned from broad-based rallies into more targeted moves. Key focus areas now include power, computing, and storage—still orbiting the AI theme.
In Hong Kong, Baidu has been a standout. Once a laggard among internet giants, its launch of new chips has pushed the stock to record highs. On the ChiNext board, after brief volatility, new highs were reached again, with many SMEs trading at valuations exceeding 100x earnings. Their profits have been lifted by “two heavyweights and two new sectors” policies, but with potential policy tapering ahead, SME valuations could face risks at the next quarterly reporting cycle.
Despite limited correlation between technological progress and fundamentals, AI- and robotics-related companies are unlikely to see sustained pullbacks. This presents opportunities for tactical buying on dips. However, at the broader index level, rising Chinese government bond yields will likely narrow trading ranges, leading to more constrained but persistent volatility compared to past cycles.