The most favorable environment for the stock market is a "Davis Double," but most of the time, achieving both aspects is challenging, as is the case with the technology industry in 2026.

On one hand, high oil prices and geopolitical tensions have caused the Federal Reserve's interest rate cut expectations to fluctuate repeatedly. At the beginning of the year, the probability of a Fed rate cut within the year was nearly 100%. By mid-March, during the peak of the U.S.-Iran conflict, this probability dropped close to zero. As the situation eased, expectations for a rate cut rebounded to around 50%. However, due to stalled negotiations, the probability has declined over the past month. This week, after the U.S. rejected Iran's 14-point written proposal, expectations for a rate cut have once again fallen to zero. As shown by the yellow curve in the chart below, U.S. Treasury yields have followed a similar pattern.

On the other hand, the commercialization progress of the AI industry in 2026 is accelerating, with both domestic and international demand for tokens finding explosive growth points. This is driving upward revisions in profit forecasts and capital expenditure expectations for leading global companies.

This is a clash between the speed of EPS revisions and the pace of rising interest rates. How will growth industries be priced when there is a divergence between the numerator (fundamentals) and the denominator (discount rate)?

Historical cases from both China and the U.S. indicate that high growth can overcome an unfavorable interest rate environment, often summarized as "rising despite rate hikes."

In our report, "Beyond the U.S.-Iran Conflict and High Oil Prices: Which Industries May Maintain Independent High Growth?" we reviewed the impact of the 1999 Kosovo War, rising oil prices, U.S. inflation, and Fed rate hikes on the U.S. market and the dot-com bubble. Other similar cases include:

1. The 1999 Dot-Com Era: Kosovo War, high oil prices, U.S. inflation, and a rate hike cycle, leading to the dot-com bubble. 2. The 2023 AI Wave: Rate hike cycle following the Russia-Ukraine conflict, coupled with the intensive release of large AI models, driving the Nasdaq to outperform. 3. The 2013 A-Share Mobile Internet Boom: Tight liquidity conditions, with a structural bull market in TMT. 4. The 2016-2017 Supply-Side Reform: Synchronized liquidity tightening in China and the U.S., leading to a bull market in cyclical stocks. 5. The 2021 High-Speed Penetration Phase of New Energy: Fed rate hikes and domestic deleveraging, with a bull market in the new energy industry.

When an industry's growth momentum remains in a high-growth phase, and leading companies are expected to achieve strong growth in the current and following years, stock performance remains robust. In other words, high earnings growth can overcome liquidity tightening.

Several possible explanations are as follows:

1. Macroeconomic slowdown does not necessarily mean a slowdown for specific industries or leading companies. Central bank rate hikes may suppress broad demand and negatively impact the economy, weighing on large-cap stocks and market indices. However, once an industry trend takes off, it is less affected by macroeconomic shocks. For example, in 2021, while China's real estate sector entered a downturn and inflationary pressures rose, the new energy sector entered a phase of rapid penetration.

2. Macro liquidity tightening does not necessarily equate to micro liquidity tightening. An increase in benchmark or risk-free rates corresponds to a tightening of broad liquidity. However, micro liquidity in the stock market is just one "reservoir" within broad liquidity and may not tighten simultaneously. For instance, during the 1999 dot-com era, U.S. mutual funds and individual investors continued to provide a steady influx of capital. Similarly, the development of A-share mutual funds in 2021 improved micro liquidity.

3. The market has a tolerance for high interest rates, provided that leading companies deliver strong earnings performance in the current year. The present value of stock prices is not significantly affected. As shown in the table below, most leading companies in relevant industries achieved profit growth of 50% or even over 100%. In the face of such high growth, forward PE valuations for FY1 could be as high as 30-50x, largely unaffected by the rise in interest rate levels. However, if high growth cannot be sustained (e.g., new energy in 2022), the market's tolerance for valuations will correspondingly decline.

4. Once signs of a weakening industry trend emerge, even if high profit growth is maintained in the current year, it is crucial to take profits decisively. This may be the most important "discipline" in growth investing. For example, in the dot-com industry in 2000 and the new energy industry in 2022, when growth expectations began to weaken (e.g., expected net profit growth falling to around 30% or halving), even a loose liquidity environment could not prevent a downturn.

Historical Case Studies: How Industry Cycles Counteract Liquidity Tightening Expectations?

U.S. Market Cases: The 1999 Dot-Com Bubble and the 2023 AI Wave

1. Case One: The 1999-2000 Dot-Com Bubble: Y2K-Driven PC Replacement Cycle vs. Kosovo War and Rate Hikes - Denominator Side: The Kosovo War and rising oil prices triggered liquidity tightening. In 1999, geopolitical conflict and oil prices were key factors ending the "Goldilocks" narrative. After the Asian financial crisis, the global deflationary cycle reversed, and commodity prices began to recover. Additionally, OPEC and non-OPEC production cuts in early 1999, coupled with the outbreak of the Kosovo War (March-June 1999), threatened transportation in the Balkans and the Mediterranean, raising concerns about supply disruptions. Oil prices rose from $10/barrel to over $30/barrel. U.S. CPI inflation also surged, prompting the Fed to re-enter a rate hike cycle in June 1999, raising the federal funds rate from 4.75% to 6.5% by May 2000. - Numerator Side: The "Y2K" bug drove high growth in the dot-com sector in 1998-1999. The Nasdaq's strong performance during the rate hike cycle was supported by the high-growth expectations driven by the Y2K-driven PC replacement cycle. Under policy directives from agencies like the OCC, FDA, and the Department of Defense to prioritize fixing system bugs, global governments and enterprises engaged in "panic buying" of outdated servers, mainframes, personal PCs, and software operating systems in 1998-1999, fueling a replacement frenzy on the numerator side. While the fundamentals of tech giants had already weakened in 1997-1998, the order surge expectations brought by Y2K created a "brief prosperity" for dot-com leaders in 1998-1999. - Market Performance: Dot-com bubble formation. The Dow Jones Industrial Index stagnated as rate hikes began, but the Nasdaq surged wildly, peaking nine months later. The Dow faced pressure from high oil prices and rate hikes in Q3 1999, briefly rallied in Q4, and peaked in January 2000. In contrast, the Nasdaq continued its strong upward trend, rising 91% from the Fed's first rate hike in June 1999 until its peak in March 2000, lagging the rate hikes by nine months. Independent industry growth momentum overcame high oil prices and rate hikes. Examining the Nasdaq 100 Index, which includes companies with substantial profitability, EPS growth surged to 60% in 1999 due to Y2K-driven high-growth expectations, with a trailing P/E ratio exceeding 90x. High valuations remained unaffected by war, oil prices, and rate hikes under the Y2K-driven growth expectations.

2. Case Two: The 2022-2023 AI Industry Boom vs. Sustained Tightening After the Russia-Ukraine Conflict - Denominator Side: Russia-Ukraine conflict disruptions and aggressive Fed tightening. In 2022-2023, global markets remained under the "shadow" of the Russia-Ukraine conflict, with the Fed continuing its tightening cycle and oil prices staying elevated. The Fed maintained its rate hike trajectory, keeping policy rates at a two-decade high (5.25-5.5%). Long-term rates and commodity prices also pressured the market. Powell's hawkish remarks at the 2023 Jackson Hole Symposium further pushed U.S. Treasury yields higher, while Brent crude oil prices remained above $80/barrel. The dual constraints of high oil prices and high rates continued to suppress market liquidity, creating a macro backdrop similar to the 1999 dot-com era. - Numerator Side: ChatGPT ignited the AI large model era. From late 2022 to early 2024, the numerator side welcomed the dawn of AI large models, with accelerated technological iteration. The release of ChatGPT in November 2022 sparked a global generative AI frenzy. 2023, as the "year of large models," saw major players like OpenAI, Google, and Meta intensively releasing models like GPT-4, Bard, and Llama 2. Microsoft increased its investment in OpenAI, while Nvidia's data center business revenue consistently exceeded expectations. In 2024, new products like Sora, Gemini 1.5 Pro, and Claude 3 followed, expanding model capabilities from text to multimodal. - Market Performance: Nasdaq rose and outperformed. The Nasdaq gained over 40% in 2023, unaffected by sustained tightening. Despite persistently tight overseas liquidity and rising benchmark rates, which theoretically suppress growth sector valuations, the AI industry cycle drove market pricing toward explosive industry trends. The Nasdaq, representing the tech industry, rose 43.4% in 2023, while the Russell 2000, more negatively impacted by rising rates, underperformed significantly.

A-Share Cases: The 2013 Mobile Internet Boom, 2016-2017 Supply-Side Reform, and 2021 New Energy Wave

1. The 2013 Mobile Internet Wave: Structural Bull Market Amid "Money Crunch" - Denominator Side: Domestic "money crunch" and Fed tapering led to extreme liquidity tightening. In 2013, the "money crunch" and synchronized domestic and international liquidity tightening subjected the market to extreme stress tests. To regulate shadow banking and interbank business expansion, the PBOC tightened liquidity injections in mid-to-late June, causing the overnight Shanghai Interbank Offered Rate (SHIBOR) to soar to a historical extreme of 13.44%. On June 20, some transactions even occurred at a funding rate of 30%. Several banks faced actual payment defaults, and the interbank payment and clearing system experienced delays. Simultaneously, the Fed signaled tapering of quantitative easing, causing the 10-year U.S. Treasury yield to surge over 100 basis points within three months, tightening global liquidity. - Numerator Side: 4G base station deployment accelerated, and the mobile gaming and mobile internet industries grew rapidly. Starting in 2013, mobile communication base station equipment construction entered a new upward cycle, with the mobile internet market growing at over 80%. Mobile gaming, as a representative application, entered an explosive growth phase in 2013. From an industry transmission logic perspective, the chain from base station construction and network coverage to application deployment was clear. The surge in 4G base station deployment drove a sharp increase in mobile internet penetration, providing solid support for the ChiNext's outperformance and effectively countering the negative impact of liquidity tightening. - Market Performance: The ChiNext delivered significant outperformance in 2013, laying the groundwork for a subsequent bull market. Despite domestic and international liquidity tightening, with the 10-year government bond yield rising from 3.4% to over 4.6%, the ChiNext Index strengthened independently, driven by industry growth. From May 2012 to May 2014, the ChiNext Index rose approximately 90%, while the Shanghai Composite Index fell about 16%, resulting in over 100 percentage points of outperformance. The high growth of the mobile internet sector effectively offset the valuation pressure from liquidity tightening.

2. The 2016-2017 Supply-Side Reform: Synchronized Tightening in China and the U.S., Bull Market in Cyclical Stocks - Denominator Side: Fed rate hikes and domestic tightening led to synchronized liquidity tightening in China and the U.S. The Fed began its rate hike cycle in late 2015, gradually raising the federal funds target rate from 0.25% to 1.5% by the end of 2017. Domestically, pressured by RMB depreciation and capital outflows, liquidity tightened in late 2016. The 10-year Chinese government bond yield rose rapidly from around 2.4% in October 2016 to about 4.0% by the end of 2017. The PBOC also raised policy rates for reverse repos and SLF in March 2017, tightening liquidity both domestically and internationally. - Numerator Side: Supply-side reform implementation led to reduced output, higher prices, and improved cyclical sector growth. From "capacity reduction" to "environmental production restrictions," supply-side reform policies were intensively implemented. In early 2016, the State Council issued guidelines for steel and coal capacity reduction, aiming to cut crude steel production by 100-150 million tons and recalibrate coal mine capacity based on a 276-day work schedule over five years. Mid-year inspections intensified, achieving hard targets of reducing crude steel by 45 million tons and coal by 250 million tons for the year. In 2017, the policy focus shifted to environmental production restrictions. The Beijing-Tianjin-Hebei "2+26" cities introduced air pollution prevention plans, deploying 5,600 personnel for intensified inspections. Steel production was cut by 50% during the heating season, and aluminum production was reduced by over 30%. Supply-side contraction signals strengthened, leading to a recovery in cyclical industry growth. - Market Performance: Cyclical stocks were the absolute industry leaders. During the 2016-2017 tightening cycle, cyclical sectors significantly outperformed the broader market. While the 10-year government bond yield rose from 2.7% to around 4.0%, liquidity tightened continuously. However, driven by profit recovery from supply-side reform, cyclical sector indices strengthened independently. From early 2016 to the end of 2017, cyclical sectors significantly outperformed the Shanghai Composite Index, with the outperformance gap widening. From May 2016 to August 2017, cyclical industries (coal, steel, non-ferrous metals, cement) rose 49%, while the Shanghai Composite Index gained 20%, resulting in 30% outperformance.

3. The 2020-2021 New Energy Wave: "Dual Carbon" Goals vs. Rising U.S. Treasury Yields - Denominator Side: Post-pandemic inflation and rising 10-year U.S. Treasury yields. From 2020 to 2021, liquidity shifted from extreme easing to tightening expectations, with U.S. Treasury yields and inflation rising simultaneously. In 2020, post-pandemic, the Fed cut rates to zero and launched unlimited quantitative easing, creating extremely loose liquidity. By 2021, with vaccine rollouts and the Biden administration's $1.9 trillion fiscal stimulus, U.S. economic recovery expectations strengthened significantly. Coupled with rebounding oil prices, U.S. CPI year-over-year growth quickly exceeded 5%, significantly boosting inflation expectations. The 10-year U.S. Treasury yield also rose steadily, pricing in tightening. - Numerator Side: "Dual carbon" policies and technological advancements drove rising penetration of the new energy industry. From 2020 to 2021, driven by "dual carbon" policies, technological progress, and cost reductions, the new energy vehicle industry entered an accelerated penetration phase. End demand exploded, with new energy vehicle sales growth and penetration rates entering their steepest phase, rapidly boosting industry growth. In the solar sector, solar cell export value growth continued to rise. Under tight supply-demand balance, the price level of the photovoltaic industry chain increased significantly. Against the backdrop of rising volumes and prices in the new energy industry chain, high industry growth offset liquidity tightening. - Market Performance: New energy earnings growth offset rising U.S. Treasury yields, with fundamentals driving pricing. Starting in the second half of 2020, the 10-year U.S. Treasury yield rose from low levels, indicating marginal global liquidity tightening. However, the new energy sector strengthened independently, driven by earnings growth. During this period, the new energy index significantly outperformed the Shanghai Composite Index, exhibiting "fundamentals-driven pricing, interest rate insensitivity." When numerator-side growth is sufficiently strong, liquidity tightening is no longer a core constraint for growth sectors.

Returning to the Present: Bubbles Are Burst by the Industry Itself, Not Interest Rates

No historical evidence suggests that rising interest rates or liquidity tightening are unfavorable for tech stocks or lead to valuation compression in growth stocks. Such logical relationships appear to be erroneous common sense that cannot withstand scrutiny or empirical testing.

If a stock's rise is largely driven by valuation expansion, then interest rate and liquidity tightening can be particularly detrimental.

However, when EPS revision expectations dominate the trend in the global AI sector, every adjustment caused by interest rate and liquidity fluctuations may present an opportunity to reposition.

Consensus earnings forecasts for major indices, data as of May 16, 2026, Bloomberg.