Drivers and Momentum Across China, Hong Kong and U.S. Markets: Rotation, AI Linkages, and Valuation Dynamics

Year-to-date performance has followed a discernible rotation: Hong Kong led in the first quarter, U.S. equities outperformed in the second quarter, and the third quarter saw A-shares surge first before Hong Kong reclaimed leadership. These regional shifts reflect both a seesaw relationship and cross-market linkages, notably in AI and compute-capacity narratives. The immediate questions are which market will lead next, how much upside remains, and from which sources the next leg of momentum will arise.

U.S. equity momentum is primarily underpinned by sustained technology trends combined with a cyclical recovery following interest-rate cuts. By contrast, the China market faces a mixed backdrop of weakening domestic fundamentals, a potential pivot in macro liquidity, anticipatory improvements in offshore liquidity, continued activity in micro-level liquidity channels, and sentiment and technical indicators that have reached elevated levels. Together, these conditions point to range-bound volatility at high levels, with the market remaining structurally driven but vulnerable to rotation-induced swings.

AI-related hardware and software demand continues to look robust across markets, producing mapping effects between regions. Crowd-positioning varies by sector. E-commerce shows high concentration, the broader internet sector remains relatively underexposed, innovative pharmaceuticals have retraced but are not at low crowding, new consumption trends trade near post-June lows, and financials such as banks and insurers are positioned near year-long lows.

Strategically, the recommended stance emphasizes exposures that may underperform over short intervals but retain long-term upside. Earlier in June, internet exposure was identified as a low-entry opportunity and has since produced substantial gains; the current analogous opportunity is in banks and dividend-paying sectors. Conversely, long-term structural themes that have become overcrowded warrant partial profit-taking to improve portfolio resilience and investor experience, accepting the potential cost of missing a final emotional surge.

Between July and August, Hong Kong equities lagged, particularly versus the mainland STAR Market’s strong advance. Entering September, market dynamics shifted: A-shares softened into a choppier regime while Hong Kong equities, buoyed by renewed Fed easing expectations and AI/internet catalysts, reasserted leadership. The Hang Seng Tech Index surpassed its March highs for the first time in six months, and U.S. indices also made new highs under the same macro backdrop.

Decomposing drivers across markets shows meaningful differences. U.S. index gains this year have been dominated by earnings improvements, while Chinese and Hong Kong gains have been mainly valuation-driven. For example, the S&P 500’s and Nasdaq’s YTD increases of 13.3% and 17.2% are largely attributable to earnings contributions, whereas the Hang Seng’s 32% advance and the Hang Seng Tech’s 40% rally have been driven predominantly by multiple expansion.

Earnings revisions also diverge. U.S. 2025 earnings estimates have been revised up to about 11.3%, broadly consistent with index performance. Hong Kong’s 2025 earnings expectation has been revised down to approximately –3%, and A-share forecasts remain essentially flat. Valuation levels reflect these differences: the S&P 500 and Nasdaq trade nearer to 22x and 27x forward P/E, supported by earnings, while the CSI 300 and Hang Seng trade around 14x and 12x forward P/E respectively. Structural dispersion exists within each market: the STAR Market commands premium multiples relative to China large caps, and U.S. large-cap leaders trade richer than their broader small-cap peers.

Valuation comparisons must account for profitability. The median P/E for China’s top tech and new-consumption leaders sits near 19x, below the U.S. “Magnificent Seven” median of about 31x, but those Chinese names also exhibit lower ROE and margin profiles, making headline P/E comparisons incomplete without underlying fundamentals.

Hong Kong currently shows signs of stretched sentiment and technical extremes, and foreign-investor flows display increasing divergence. Since mid-September the Hang Seng has moved above 27,000—its highest since mid-2021—while Hang Seng Tech has climbed to levels not seen since 2022. The recent advance has been disproportionately driven by internet names, compressing their risk premiums versus the earlier DeepSeek-driven episode. Forward P/E on the Hang Seng at roughly 12x sits about one standard deviation above its ten-year mean, and Hang Seng Tech at approximately 21x exceeds its post-2022 average. Using a weighted risk-premium framework calibrated to southbound flows and blended China/U.S. bond benchmarks, the Hang Seng’s implied risk premium near the 27,000 mark is comparable to the peak seen during the 2018 property cycle, while Hang Seng Tech’s implied premium is at multi-quarter lows.

Technical readings point to short-term overheating. The 14-day RSI approached 71 on September 14, signaling overbought conditions, and short-interest-adjusted turnover fell sharply from late-August levels—evidence of aggressive short-covering and reduced bearish pressure. At the same time, EPFR data indicate that after several weeks of inflows into A-shares, global active managers turned net sellers this week, with comparable outflows from Hong Kong. Investor surveys show a rising preference for profit-taking following the rebound and a marked decline in bullish sentiment toward China among Asia-focused investors.

Looking forward, the U.S. market’s durability will hinge on three interlocking supports: continued AI-driven momentum among major tech leaders and the translation of AI initiatives into orders and revenues, a cyclical rebound in rate-sensitive sectors fostered by Fed easing, and the fiscal impact of major U.S. initiatives beginning a new fiscal year in October. Together these factors could sustain earnings upgrades and broaden participation, and any valuation normalization would offer attractive entry points into tech and cyclical segments.

For A-shares and Hong Kong, the path forward presents two principal scenarios. The first requires a macro-driven improvement in fundamentals and liquidity that enables earnings-led breadth and a sustained extension of the rally into more sectors. Achieving that outcome depends on clear policy stimulus and supportive demand trends. The second scenario maintains a micro-liquidity–driven, thematic rotation concentrated on pockets of strong expectation—yet elevated valuations mean rotation and volatility will be frequent.

Near-term macro indicators suggest headwinds for the broader expansion scenario. August retail sales grew 3.4% year-on-year, slowing for the third consecutive month with pronounced weakness in Beijing. Durable-goods demand eased as replacement incentives waned, and property sales and developer investment remain fragile. Private credit growth shows signs of slowing, and the scope for incremental fiscal stimulus is narrowing given prior high base effects. These developments imply a potential turning point in aggregate macro liquidity in September and raise the bar for a broad-based earnings recovery.

If broad macro support is not forthcoming, structural, micro-driven themes aligned with AI and technology mapping between markets remain the most sustainable focus. Examples include compute-chain exposures tied to global AI leaders, robotics narratives linked to major hardware initiatives, and supply-chain plays associated with consumer-technology ecosystems. Rate-cut–induced recovery could also favor real-estate–linked demand chains such as home furnishings and appliances, as well as investment-related sectors like construction machinery and select commodities.

Tactically, maintain a structure-first approach that emphasizes exposures with durable upside even if short-term underperformance is possible. Internet and AI-related software and hardware remain central in the near term, but given elevated positioning, selective profit-taking and reallocation toward lower-crowding, high-quality opportunities—such as banks and dividend-oriented sectors—may enhance portfolio stability. Recognize that different strategies fit different risk profiles; consistent application of an investment framework is critical to avoid repeated mistimed switching.

In sum, the subsequent market trajectory will be shaped by macro-policy direction. Absent a decisive broad-based macro recovery, cross-market thematic mapping—anchored in technology and AI linkages—offers a viable, repeatable approach to capture the next phase of returns