Key Takeaways:
A potential Federal Reserve rate hike later this year is widening an already extreme valuation chasm between AI and non-AI stocks in China, where the gap has reached levels unseen in developed markets.
The S&P 500 fell after Fed Chair Kevin Warsh held his first press conference on Wednesday, with the central bank signaling the possibility of a rate increase in 2026. The 10-year U.S. Treasury yield traded near 4.45%, while the dollar index climbed to 100.8 from 99.0 a month earlier, reviving a "great moderation" narrative reminiscent of the 1990s.
"Tech investors are not as used to looking at rates," said Peter Boockvar, chief investment officer at One Point BFG Wealth Partners. "All of a sudden tech investors need to listen to what Kevin Warsh has to say, they need to start paying attention to what the inflation stats are and how the U.S. Treasury market responds to it."
The divergence between AI and non-AI stocks has become a global phenomenon, but its magnitude varies sharply by market. Year-to-date cumulative excess returns for AI over non-AI stand at 157% in Korea, 143% in China, 134% in Japan and 96% in the U.S., according to CITIC Securities. Yet the valuation picture tells a different story: the AI-to-non-AI price-to-earnings ratio is 1.48 times in the U.S., 1.45 times in Japan and 1.27 times in Korea — versus 9.8 times in A-shares, where the AI basket trades at roughly 92 times earnings while non-AI stocks trade at just 9 times.
Why rate hikes hit AI and non-AI differently
The current AI-driven rally resembles the 2006-2007 bull market more than the dot-com bubble, CITIC argued. The Nasdaq 100's forward PE of 25 times is far below the 60 times peak of 2000, and the "Magnificent Seven" trade at 38 times earnings versus 82.7 times for the "Four Horsemen" at the bubble's apex. The rally is driven by infrastructure investment — a "bottleneck trade" — rather than speculative valuation expansion.
Rate increases affect this dynamic differently than they would a growth-stock rally. The Fed raised rates in June 1999 and the Nasdaq peaked seven months later. But during the 2004-2007 cycle, the bull market continued for 38 months after the first hike. For AI stocks tied to physical investment cycles, CITIC said, rate hikes only matter if they threaten end-user demand, commercialization assumptions or capital expenditure growth. Markets currently price no rate cut in 2026 and a 25-basis-point hike by October.
A-shares face dual pressure from strong dollar and ETF outflows
The return of a strong dollar narrative is compounding pressure on China's non-AI sectors. While global industrial demand from AI infrastructure, defense spending and developing-market industrialization remains intact, A-share non-AI cyclical stocks have underperformed their overseas peers. The 10-year U.S. yield has fallen from 4.6% on May 18 to around 4.45% on June 18, yet the dollar index rose over the same period — a divergence that signals capital returning to the U.S. rather than a liquidity-driven dollar squeeze.
Adding to the pressure, the four CSI 300 exchange-traded funds held by Central Huijin Investment recorded cumulative net redemptions of 422 billion yuan during the week of June 15-18, according to 2025 annual report data. Broad-based ETF net redemptions have persistently weighed on non-AI sectors lacking clear narrative catalysts, while AI names continue to attract flows.
CITIC recommends maintaining an "AI plus cyclicals" allocation, favoring less crowded AI sub-sectors such as storage, gas turbines, diesel generator sets and select semiconductor equipment and materials. On the cyclical side, it favors electrolytes and separators in new energy, cost-advantaged chemicals like refrigerants and phosphorus chemicals, and compute metals including tin, copper and tungsten that have AI exposure but remain undervalued due to rate-hike narratives. The brokerage also recommends adding undervalued券商 (securities) stocks, where liquidity headwinds may ease in the second half of the year.
This article is for informational purposes only and does not constitute investment advice.
