GF Securities: How do you view the correction in A-share and US tech stocks?

Recently, under the impact of the downward adjustment of growth expectations, upward revision of inflation expectations, Microsoft's reduction of data center spending, and external tariffs, the stock indexes have plummeted significantly. Since reaching its peak at the end of 2024, the MAG7 index has experienced its largest drop of 13.6% as of this Thursday. At the same time, on Friday, the Hong Kong and A-share markets also experienced significant adjustments, especially in the popular technology sectors such as Siasun Robot&Automation and artificial intelligence in recent months. In this article, we discuss several issues: 1. Review of the "MAG7" market: Is this adjustment "mid-flight refueling" or "trend peaking"? 2. Did the style switch during the "MAG7" adjustment period, and how to deal with it? 3. What are the investment laws of the "MAG7" market? 4. What stage is the technology market in A-shares, and how to view the future? I. Review of the "MAG7" market: Since the beginning of 2023, the MAG7 index has experienced five adjustments in the upward trend. This adjustment since the end of 2024 is the fifth. (1) On average, the first four adjustments: dropped for 35 trading days, then took 19 trading days to reach a new high. As the market progresses, the speed of adjustment becomes faster, and the speed of reaching new highs becomes slower. The current fifth adjustment, as of February 27, 2025, has lasted for 47 trading days, with a 13.6% decline, exceeding the previous three times and approaching the fourth. (2) Causes and consequences of the adjustment: The first three times were due to liquidity shocks, while the fourth and fifth times have fundamental factors. Liquidity disturbances will not reverse the market, but fundamental problems may cause a longer adjustment period. The first three adjustments were more of a correction of overly optimistic liquidity or liquidity shocks from risk events such as the Silicon Valley bank incident in March 2023, bond issuance in the third quarter of 2023, yen carry trade in August 2024, etc. As liquidity issues ease, funds re-enter the MAG7. In the fourth and current fifth adjustments, fundamental issues have begun to pose a challenge. II. Was there a style shift during the adjustment period? (1) There was a drift in style during the adjustment period. In the fourth and fifth adjustments where fundamental impacts were stronger, style reversal was more pronounced. For example, during the fourth adjustment, IT fell by 12.1%, utilities rose by 9.8%, healthcare rose by 6.0%. (2) How to deal with style shifts during the adjustment period? In stages where there are liquidity or event-driven shocks but no change in fundamental trends, there may not be a need for style shifts. However, in stages where there are differing views on fundamentals, the style switch may be more radical. Safe options: traditional low-beta sectors such as utilities, daily consumption, or healthcare and real estate favored by declining interest rates. III. Investment laws of the "MAG7" market: The level of prosperity determines relative returns, and changes in growth rates determine turning points in stock prices. Looking at the trends of the MAG7 index in the past two years: from the first quarter of 2023 to the third quarter of 2024, the growth rate accelerated, entering a double phase; starting from the end of 2024, the growth rate marginally declined, entering a volatile phase. However, whether it enters a downward trend depends on whether the level of prosperity remains high in a volatile manner or rapidly declines. The expected growth rate by 2025 is predicted to decline from the current 55.8% to 31.7%, and further decline to 15.6% in 2026. From this perspective, it may be difficult for the short-term trend of the MAG7 to continue an upward trajectory. In the optimistic scenario, it may maintain a high level of volatility, while in the pessimistic scenario, it may need a long period of volatility to absorb the current valuation. However, there is a significant divergence in profit trends among individual stocks in the MAG7. IV. What stage is the technology market in A-shares: Investment in growth sectors generally starts with thematic investment, followed by oscillations and adjustments, and then enters a stage of performance realization (prosperity investment). Looking ahead: (1) The progress of industries such as DeepSeek and domestic Siasun Robot&Automation is bringing the corresponding sector stocks closer to prosperity investment from thematic investment of the past two years, or perhaps more specific sector segments may emerge, similar to the previous light module sector. Consequently, each crowded retracement may present an opportunity for re-allocation. (2) In the past two years, AH-share industries such as Ai and Siasun Robot&Automation have often worried that a decline in US tech giants would end opportunities for domestic stocks. However, since DeepSeek, both the increasing capital spending by domestic major companies and government levels, indicates progress and an industrial chain domestically, weakening the influence of US tech giants on Chinese stocks. (While the risk appetite of US stocks has been affected, starting from the Chinese New Year, TSMC's US stocks fell by around 18%, compared to only around 8% for TSMC's Taiwan stocks). (3) In the short term, in addition to industrial progress, the frenzy period of small and medium-sized growth after Chinese New Year has further increased risk appetite. Historically, the frenzy period after the Chinese New Year has lasted an average of about 31 trading days. Currently, it is just past the halfway mark. (4) From a top-down perspective, at the current stage, low-position cyclical sectors may have some room for a rebound, but the current macroeconomic fundamentals and policies belong to a "calmness" phase with minimal marginal changes, insufficient to attract large amounts of funds. Upon entering March, large companies (Xiaomi, ByteDance, Tencent) may still have more industry progress and events. (5) Therefore, the main theme of technology styles is not expected to change significantly. Focus on AI applications benefiting from reduced inference costs, all-in-one machines and localization deployment; within Siasun Robot&Automation, focus on specific segments such as tendons and electronic skin; low-growth areas, focus on military electronics; thematic investments, focus on cultural globalization and low-altitude economy. Source: WeChat official account "Chenming's Strategic Thinking", author GF SEC Strategy Team, GMTEight editor: Chen Qiuda.