Morgan Stanley Investment Management has stated that the market movements since August reflect chip rebalancing under a stock-picking game rather than a trend-driven rally. Looking ahead, the institution believes the strongest opportunities lie in tech sectors with verifiable earnings, prioritizing optical interconnects, optical chips, storage, and domestic expansion chains — where orders and price hikes can be validated and directly benefit from the most sustainable earnings momentum. Energy and chemicals, along with healthcare, follow as secondary picks, while low-valuation value plays in financials, coal, and power are also worth attention. Precious metals should be revisited after rate hike expectations have been fully digested.

Last week, A-shares initially dipped before recovering, with a sharp volume-driven decline on Monday followed by four consecutive days of gains. The Shanghai Composite Index climbed back above the 3,950-point level, while the ChiNext Index fell 3.42%. Small-cap and value styles outperformed, with resource and domestic-demand sectors leading gains, while growth-oriented areas like new energy and healthcare came under pressure. Market breadth improved from the prior week. Average daily turnover across both exchanges stood at approximately 1.99 trillion yuan, down about 280 billion yuan week-on-week, and margin financing shifted to net outflows. Overseas, U.S. stocks posted modest weekly gains, but all three major indices closed lower on Friday after Fed Chair Warsh delivered hawkish remarks, with the Philadelphia Semiconductor Index plunging 3.47% and COMEX gold falling below the $4,500 mark.

The market trajectory since August has been about chip rebalancing under a stock-picking environment rather than a sustained trend. Trading volume has gradually declined from 2.66 trillion to 1.81 trillion, before rebounding to 2.13 trillion at month-end on better-than-expected external guidance. Two defining characteristics stand out: pricing models have shifted from sector beta to individual stock alpha, and the driving force has moved from valuation recovery to earnings catalysts — with resource and tech themes rotating as dual drivers, though the market has yet to break into a broad-based uptrend.

Morgan Stanley Investment Management notes that fluctuating policy expectations create periodic headwinds, while earnings show structural improvement though aggregate recovery still awaits confirmation. On the policy front, Warsh has established a price-stability-first framework, acknowledged that financial conditions are not restrictive, and refused to characterize his remarks as forward guidance — marking the closest acknowledgment yet that rate hikes are possible. This is expected to interrupt the process of trading around potential monetary policy reversals. The difficulty for investors in judging Fed policy shifts has risen significantly. The Fed now faces a genuine dilemma: inflation stickiness persists, yet employment and credit conditions do not support sustained tightening. The remarks appear more about preserving policy optionality, and whether the actual policy path changes remains to be tracked further. The mid-September FOMC meeting may offer little concrete confirmation, but rate hike expectations will intermittently roil markets — likely creating short-term shocks, while the medium term requires step-by-step observation.

On the earnings front, the focus is on identifying sectors that could accelerate in the second half. In Q2, both revenue and net profit growth for all A-shares excluding financials and two barrels accelerated, with cyclical and TMT sectors posting widening year-on-year growth. TMT offers the strongest earnings sustainability for H2, with the market shifting from long-dated narratives to near-term positive momentum changes. The path may not be smooth, but structural opportunities remain prominent. Midstream manufacturing faces dual pressures from export-related exchange losses and trade frictions — FX headwinds may ease marginally while trade friction pressures persist, similar to H1, with opportunities best identified on a bottom-up basis. Cyclicals are diverging internally, with acceleration and deceleration expected roughly evenly split in the second half.