Commentary: An Investor’s Guide to a Market of Entangled Risks

Summary:

1. Recent macroeconomic risk events such as global trade friction, U.S. credit events, and shifts in overseas political environments have caused heightened market volatility, though these events have not amounted to full-blown crises. These risks are part of broader adjustments reflecting changes and uncertainties in the global order, heavily influenced by U.S. policies under President Donald Trump. Notably, two significant equity market corrections in 2025 were linked to Trump’s aggressive tariff actions, although markets have adapted more efficiently over time due to learned strategies and increased familiarity with such disruptions. Short-term market sentiment improved following indications of softer trade tensions, but underlying geopolitical risks prevail, with ongoing trends toward a multipolar world and trade decoupling foreshadowing continued volatility[para. 1][para. 2][para. 3].

2. Key asset allocation implications arise from this environment. Gold remains the preferred safe haven during geopolitical turmoil. The ongoing restructuring of global geopolitics and a global shift to the political right are likely to accelerate defense spending, making defense stocks and sectors involved in national self-sufficiency more attractive. High-dividend sectors are viewed as tactical short-term options in the domestic market, given skeptical investor reactions to Trump’s threats. Furthermore, due to OPEC+’s ongoing production increases, crude oil’s effectiveness as a geopolitical risk hedge appears diminished[para. 4][para. 5][para. 6][para. 7].

3. There is growing talk of an AI investment bubble. From a demand perspective, AI computing power needs are accelerating rapidly, evidenced by exponential growth in large language model usage and the fast uptake of new AI applications such as Sora 2. McKinsey forecasts that by 2030, global AI computing demand could be 3.5 times that of 2025, representing $6.7 trillion in spending. However, on the supply side, constraints in energy (aging power grids and slow clean energy build-out), capital (negative cash flows at tech giants), and hardware (lengthy semiconductor production cycles) are likely to persist, slowing the emergence of a classic bubble[para. 8][para. 9][para. 10][para. 11][para. 12][para. 13].

4. Compared to the dot-com bubble, the current AI-powered market rally is in its early or middle stages. Valuations are relatively high but not extreme, with robust earnings growth cushioning some risks. The Nasdaq index is up about 120% since late 2022—well below the 580% surge seen during the internet bubble. The belief is that as long as tech companies continue strong earnings growth, valuations can be justified. However, overinvestment in infrastructure without clear signs of profitable downstream applications could become unsustainable[para. 14][para. 15][para. 16].

5. From a macro-cycle perspective, the AI sector has not yet shown classic bubble features like excessive asset prices and liquidity tightening. Current monetary and fiscal policy stances under the Trump administration and the Federal Reserve remain supportive, lowering the near-term risk of sharp liquidity withdrawal. However, further monetary/fiscal expansion could cause medium- and long-term overheating, especially in AI-linked sectors[para. 17].

6. While AI is not currently a bubble, investment risks remain. The mid-to-upstream industrial chain offers more visible and predictable profit opportunities, particularly in semiconductors and equipment. Downstream business models face more competition and less visibility. Should the AI narrative falter, a stock market correction could ensue, making gold and bonds attractive hedges[para. 18][para. 19].

7. Overseas stagflation risks exist, particularly in the U.S. Short-term hazards skew toward stagnation, with rising rate cut expectations amid persistent government shutdowns and labor market pressure. Long-term risks shift to inflation, with supportive monetary and fiscal policies and manufacturing recovery favoring equities and commodities over long-term bonds[para. 20][para. 21].

8. U.S. credit risk, while currently contained, is a concern, especially for low- and middle-income borrowers. Easing cycles by the Fed should help stabilize conditions, especially in private credit markets like commercial real estate, with robust nominal GDP lending further support. The recommended strategy remains “buy the dip” on market downturns[para. 22].

9. The article’s analysis is authored by Zhang Jiqiang, Huatai Securities’ chief fixed income analyst, emphasizing these views are independent[para. 23][para. 24].