GF SEC: How to view the adjustment of technology stocks?

GF Securities released a research report, stating that the A-share case shows that if it is not the end of the industry trend, during the bull market process, adjustments caused by various factors usually occur around 21 trading days, with a decline of around 19%; the adjustment space for US stocks is similar, but the adjustment time is longer. From experience, the adjustment space for the current A-share technology sector is already quite sufficient, although the adjustment time is slightly insufficient compared to historical norms. In the medium term, AI investment following industrial progress (model upgrades, hardware iterations, token explosions, financial report guidance) to achieve an "advance two steps, retreat one step" upward trend should be a healthier and more long-term trend. This differs significantly from the "leverage bull" of the ChiNext board in 2015 and the late 1990s dot-com bubble. GF Securities' main points are as follows: How to view the extent and duration of the current AI sector adjustment? This article will discuss this further. I. How to view the recent adjustment of growth stocks? Assuming that the wheels of industrial progress are still moving forward, how much time and space should technology investments endure for adjustment? The A-share case shows that if the industrial trend is not ending, adjustments caused by various factors during the bull market process usually occur around 21 trading days, with a decline of around 19%; the adjustment space for US stocks is similar, but the adjustment time is longer. From experience, the adjustment space for the current A-share technology sector is already quite sufficient, although the adjustment time is slightly insufficient compared to historical norms. In the medium term, AI investment following industrial progress should be viewed as a more healthy and long-term trend. This is very different from the situations in 2015 and the late 1990s, which faced significant bursts of speculation that were quickly debunked. As we look to the future, this round of AI industry investments, due to the high degree of integration in the global capital markets and deep participation of various investors, closely track and discuss industry progress. Without a grand narrative like the Y2K bug in 1999 to support optimistic demand, and without the extreme leverage seen in the A-share market in 2015, the tracking of demand, capital expenditure, and return on investment within the industry can be said to be "frame-by-frame verification," and adjustments resulting from disagreements can be reinitiated after the industry trend is confirmed. Whether it's the US stock market or the A-share market, the next earnings reporting season is approaching. The recent controversies and disagreements within the industry will be further validated during the earnings season. After the short-term fluctuations in sentiment, returning to rational fundamental tracking and examination is more important. II. In the history of the A-share growth theme, how long and how much adjustment has there been? Historical trend markets often go through a process of "trend - consolidation - trend continuation/trend termination"; if the trend sector breaks below the 20-day moving average by more than 5%, the market is likely to enter a consolidation phase. After the trend is broken, whether it enters a consolidation or a termination phase is mainly determined by the industry trend itself. If the industry trend remains strong, the sector can continue to rise after consolidating and waiting for confirmation of performance. Based on 35 adjustments of 13 main themes since 2012, the average adjustment period is 21 trading days, with an average decline of 19%. After volatility adjustments, the degree of adjustment from high levels is approximately 5 times the average candlestick size of the past month. Even after the increase in quantification, the extent of the main trend correction remains applicable, with no systemic increase observed. As seen in the above chart, the adjustment of the current A-share technology sector is generally consistent with the experience of previous cases. The only difference is that the adjustment speed is too fast, and the time for digestion may not be enough. Patience is needed, while maintaining respect for the industry trend. III. Experience of growth sector adjustments in the US stock market From 2023 onwards, on average: the adjustment period is 40 trading days, and the adjustment amplitude for the S&P 500, Nasdaq, MAG7, and Philadelphia Semiconductor Index are -8.8%, -12.0%, -13.4%, and -17.6% respectively. In this round of adjustments, the Philadelphia Semiconductor Index had a maximum adjustment of 16% in late June, making it close to the average level in terms of decline, but in terms of the time dimension, it may need to digest for another period. Risk warning. Geopolitical conflicts exceeding expectations could lead to higher-than-expected global inflation pressures; overseas inflation and the resilience of the US economy could lead to faster entry into a tight liquidity cycle; if the domestic growth stimulus is weaker than expected, it could lead to a lackluster economic recovery and a decline in market risk appetite.