Two worlds, two preparations

Summary

1 The Strait opened as scheduled, but HALO trading only appeared in the U.S. mainland.

After the U.S.-Iran memorandum of understanding was signed, the drop in oil prices led to a rapid decline in inflation expectations. However, real interest rates did not fall in tandem, and the market continues to actively price in a tight monetary environment, with the dollar index performing strongly. This is primarily driven by two factors: first, the upward momentum in the U.S. economic fundamentals fueled by AI investment; second, the U.S. government's proactive stance on reshaping dollar credibility. This has also led pro-cyclical trading to concentrate more in the U.S. stock market, while overseas markets have been notably suppressed. A decline in U.S. real interest rates may require a relative weakening of U.S. economic data to drive down market tightening expectations. In the short term, the World Cup effect, the U.S. housing bill, and individual tax rebate effects may keep U.S. economic data resilient, while in the medium term, the sustainability and diffusion of AI investment remain core variables. Notably, the increased uncertainty of this variable is also the main source of current market divergence and volatility.

2 AI inflation is spilling over, and attention should be paid to whether the AI investment chain shows a "stagflation" pattern of volume-price divergence.

The rapid development of the industrial wave has led to widespread shortages and price increases, allowing AI hardware to enjoy negative real interest rates. This is a key reason why tech stocks have performed strongly in a high-interest-rate environment. The AI investment chain is in a clear "overheating" cycle and has not yet entered stagflation. However, as widespread and sustained price increases along the AI supply chain continue to spill over, the old and new worlds are beginning to converge. This Thursday (June 25, 2026), Apple, recognized as one of the leading companies with the largest shipment volume and strongest bargaining power in the traditional consumer electronics sector, broadly raised its product prices. This seems more like a signal that its profit erosion from the traditional world has approached its limit, and concerns about the collapse of traditional demand are beginning to erode the performance of AI-related upstream hardware tech stocks. Of course, consumer electronics fall under traditional demand, and this does not necessarily indicate the onset of the stagflation cycle in AI investment that we previously flagged. The characteristic of a stagflation cycle is generally the layer-by-layer transmission of upstream price increases downstream, ultimately suppressing demand. Looking ahead, the future pass-through pricing behavior and final gross margin performance of the downstream players in the true AI infrastructure investment chain (chipmakers and AI server providers represented by Nvidia, AMD, and Broadcom), as well as the acceptance by end cloud providers, will become crucial. The upcoming mid-year earnings season will be an important verification point. In fact, during the U.S.-Iran conflict, AI tech stocks, with their high景气 and relatively independent safe-haven attributes, became the core market theme, enjoying low-volatility gains. Currently, because the U.S. economy has already moved up in its cycle, as the tech sector enters a high-volatility range, traditional industry assets have started to rise noticeably, and the industrial sector has begun to recover. However, globally, this phenomenon is not yet pronounced. Looking ahead, the global market will need to observe the recovery of manufacturing activity after the strait opens. If this coincides with volume-price cycle changes in the AI industry, market style may shift toward rebalancing.

3 Reshaping dollar credibility + AI investment boom: resonance, but also cracks.

The cycle of the U.S. reshaping dollar liquidity can be understood as: AI technological progress → industrial investment brings economic recovery → more support for monetary policy discipline → capital flows back to dollar assets → further support for AI capital expenditure and a decline in U.S. bond yields instead. However, its cracks lie in: reshaping dollar credibility (the expansion rate of M2 relative to GDP since 2009 needs to slow down) → U.S. stock market cap/M2 is already at historical highs → U.S. stock refinancing and new IPO financing must continue to support capital expenditure → upstream inflationary pressures further raise this requirement. Currently, a triangle of strong dollar + strong AI + strong economy is forming, but it is not a stable structure, and investors need to constantly monitor its changes.

4 Two worlds, two preparations.

The pricing of the old and new worlds is gradually converging. How to navigate the shrinking circle market? We offer two approaches: First, before seeing clear "stagflation" signals in the new world, even though volatility may increase during the shrinking process, investing in inflation sources remains a reasonable strategy to embrace the "center of the circle." This is especially true for segments where demand is already substantially coming from the new world represented by AI and is relatively less affected by the collapse of traditional demand, such as semiconductors/AI materials, semiconductor equipment, and manufacturing, which benefit from demand driven by both midstream expansion and downstream capital expenditure. Second, from a odds perspective, given that the recent market divergence in investment around the old and new worlds has become increasingly extreme, one can also pay appropriate attention to potential "oversold" opportunities in the traditional world where there may be upside surprises in the upcoming mid-year earnings season. Based on industrial enterprise profit data for May 2026, the momentum in mid-to-upstream mining and raw material manufacturing remains relatively favorable. Among them, chemicals and non-ferrous metals are the only two industries, besides electronics manufacturing, whose cumulative year-on-year profit growth in May is still above 50%. Based on the performance forecast disclosures as of now, excluding TMT, some companies in lithium batteries and chemicals also show better-than-expected results. The sources of their earnings resilience include strong anti-risk capabilities from vertical integration, bottoming out of industry supply-demand structures, and resilient external demand with high profitability. These may also be directions worth exploring in the traditional world. Furthermore, if non-U.S. demand, manufacturing PMI, emerging market investment, and export structure improve in the future, A-share pro-cyclical stocks may shift from valuation recovery to earnings recovery. The elasticity of sectors such as industrial metals, refining and chemicals, auto parts, specialized equipment, general equipment, and other power equipment will depend more on the confirmation of these indicators. If the market experiences a significant increase in volatility during the shrinking circle scenario, the safe-haven attributes of dividend-yielding assets are also expected to stand out.

Risk Warning: Domestic economic recovery falls short of expectations; overseas economy experiences a sharp downturn.

1 The Strait opened as scheduled, but why did it not bring new HALO trading?

After the U.S.-Iran memorandum of understanding was signed, despite discrepancies in rhetoric between the two sides, traffic through the Strait of Hormuz is slowly recovering. Notably, the drop in oil prices led to a rapid decline in inflation expectations. However, real interest rates did not fall in tandem, and the market continues to actively price in a tight monetary environment, with the dollar index performing strongly. This is primarily driven by two factors: first, the upward momentum in U.S. economic fundamentals fueled by AI investment; second, the U.S. government's proactive stance on reshaping dollar credibility. This has also led pro-cyclical trading to concentrate more in the U.S. stock market, while overseas markets have been notably suppressed. A decline in U.S. real interest rates may require a relative weakening of U.S. economic data to drive down market tightening expectations.

In the short term, the World Cup effect, the U.S. housing bill, and the individual tax rebate effects of the "Great Beautiful" bill may keep U.S. economic data resilient, while in the medium term, the sustainability and diffusion of AI investment remain core variables. Notably, the increased uncertainty of this variable is also the main source of current market divergence and volatility.

2 AI inflation spillover, the old and new worlds begin to converge.

The rapid development of the industrial wave has led to widespread shortages and price increases, allowing it to enjoy negative real interest rates. This is a key reason why tech stocks have performed strongly in a high-interest-rate environment. However, as widespread and sustained price increases along the AI supply chain continue to spill over, the old and new worlds are beginning to converge. This Thursday (June 25, 2026), Apple, recognized as one of the leading companies with the largest shipment volume and strongest bargaining power in the traditional consumer electronics sector, broadly raised its product prices. This seems more like a signal that its profit erosion from the traditional world has approached its limit, and concerns about the collapse of traditional demand are beginning to erode the performance of AI-related upstream hardware tech stocks.

The old and new worlds may no longer be two independent trading threads. Looking ahead, as the demand side of the traditional world gradually enters the "stagflation" zone, the future pass-through pricing ability and final gross margin performance of the downstream players in the new world (chipmakers and AI server providers represented by Nvidia, AMD, and Broadcom), as well as the acceptance by end cloud providers, will become crucial. The upcoming mid-year earnings season will be an important verification point. In fact, during the U.S.-Iran conflict, AI tech stocks, with their high景气 and relatively independent safe-haven attributes, became the core market theme, enjoying low-volatility gains. Currently, because the U.S. economy has already moved up in its cycle, as the tech sector enters a high-volatility range, traditional industry assets have started to rise noticeably, and the industrial sector has begun to recover. However, globally, this phenomenon is not yet pronounced. Looking ahead, the global market will need to observe the recovery of manufacturing activity after the strait opens. If this coincides with volume-price cycle changes in the AI industry, market style may shift toward rebalancing.

3 The contradiction between reshaping dollar credibility and the demand for market capitalization expansion.

The cycle of the U.S. reshaping dollar liquidity can be understood as: AI technological progress → industrial investment brings economic recovery → more support for monetary policy discipline → capital flows back to dollar assets → further support for AI capital expenditure and a decline in U.S. bond yields instead. However, its cracks lie in: reshaping dollar credibility (the expansion rate of M2 relative to GDP since 2009 needs to slow down) → U.S. stock market cap/M2 is already at historical highs → U.S. stock refinancing and new listings themselves constitute support for capital expenditure → upstream inflationary pressures further raise this requirement.

Currently, a triangle of strong dollar + strong AI + strong economy is forming, but it is not a stable structure, and investors need to constantly monitor its changes.

4 Within the narrative, outside the narrative.

In terms of specific allocation recommendations, we offer two approaches: First, before seeing clear "stagflation" signals in the new world, even though volatility may increase during the shrinking process, investing in inflation sources remains a reasonable strategy to embrace the "center of the circle." We recommend semiconductors/AI materials, semiconductor equipment, and manufacturing, which benefit from demand driven by both midstream expansion and downstream capital expenditure. Second, from a odds perspective, given that the recent market divergence in investment around the old and new worlds has become increasingly extreme, one can also pay appropriate attention to potential "oversold" opportunities in the traditional world where there may be upside surprises in the upcoming mid-year earnings season. Based on industrial enterprise profit data for May 2026, the momentum in mid-to-upstream mining and raw material manufacturing remains relatively favorable. Among them, chemicals and non-ferrous metals are the only two industries, besides electronics manufacturing, whose cumulative year-on-year profit growth in May is still above 50%. Based on the performance forecast disclosures as of June 27, 2026, excluding TMT, some companies in lithium batteries and chemicals also show better-than-expected resilience. Furthermore, if non-U.S. demand, manufacturing PMI, emerging market investment, and export structure improve in the future, A-share pro-cyclical stocks may shift from valuation recovery to earnings recovery. The elasticity of sectors such as industrial metals, refining and chemicals, auto parts, specialized equipment, general equipment, and other power equipment will depend more on the confirmation of these indicators. If the market experiences a significant increase in volatility during the shrinking circle scenario, the safe-haven attributes of dividend-yielding assets are also expected to stand out.

5 Risk Warning

Domestic economic recovery falls short of expectations: If subsequent domestic economic data unexpectedly weakens, the assumption in the text regarding the stabilization and recovery of corporate capital returns will no longer apply.

Overseas economy experiences a sharp downturn: If the overseas economy declines more than expected, the global manufacturing co-recovery may pause, and demand for real assets will also slow down.

Source of this article: Yiling Strategy Research

Risk Warning and Disclaimer

        The market is risky, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this article is at your own risk.