CICC released a research report stating that the Federal Reserve raised interest rates by 25 basis points at the September FOMC meeting, lifting the benchmark rate to 3.75%-4.00%, in line with market expectations. This marks the first adjustment to the federal funds target rate since December 2025 and the first rate hike since July 2023. Previously, the Fed had cut rates six times between September 2024 and December 2025, for a cumulative reduction of 175 basis points. In terms of allocation, the firm suggests focusing on: 1) tech growth stocks; 2) sectors with improving earnings and better supply-demand dynamics, taking into account geopolitical conditions and the capacity cycle. The fundamental recovery in purely domestic demand industries remains relatively slow and warrants further observation.
How does the Fed's rate hike affect A-shares? This hike may not signal the start of a broader tightening cycle, which carries different implications for the A-share market. From a general transmission perspective, sustained Fed tightening could impact A-shares through three channels:
1) Capital flows: Fed rate hikes could tighten global liquidity. Higher overseas financing costs typically strengthen the dollar, leading to shifts in exchange rates and capital flows that affect A-share funding expectations. 2) Fundamentals: Rate hikes may weigh on exports, especially with U.S. interest rates already at elevated levels. Tightening could dampen demand in traditional overseas industries, thereby suppressing export demand for some Chinese suppliers. 3) Policy space: Generally, Fed hikes could influence expectations for domestic monetary policy from an external standpoint. However, this particular hike may differ from a typical start of a Fed tightening cycle, and whether it will have a sustained impact on A-shares remains to be seen. If it turns out to be a short-term or one-off move, the impact would be relatively limited, especially since A-shares have already priced in much of this scenario.
Given the rebound in U.S. inflation and strong non-farm payroll data over the past two months, markets have largely factored in this rate hike. According to CME FedWatch, the probability of this hike was priced at over 90% before the announcement. The recent weakness in A-shares has been partly driven by external pressures, with Fed hike expectations being a key headwind. That said, there is significant uncertainty over whether this hike will lead to a prolonged tightening cycle.
This year, the rise in U.S. inflation has been closely tied to oil price increases driven by geopolitical conflicts. In particular, the recent escalation in U.S.-Iran tensions has broadened the impact, pushing Brent crude back above $100 per barrel. But in the medium term, the effect of geopolitical risks on oil prices is highly uncertain, and the current U.S. economic environment may not support sustained or aggressive rate hikes. CICC has previously noted that the Fed faces a "triple constraint"—inflation targets versus market constraints, FOMC committee dynamics, and political and high-debt pressures. Current U.S. policy actions may accelerate the restructuring of the international monetary order, further driving diversification and fragmentation in global asset allocation. Against this backdrop, if medium-term constraints limit the Fed's ability to sustain hikes, the impact on A-shares may be moderate, with much of it already reflected in valuations.
How should investors position going forward? Recent A-share volatility has been largely driven by external factors, including Middle East tensions, Fed rate hike expectations, and rising U.S. Treasury yields. However, these external disruptions tend to have short-term and phased effects. This year, the fundamentals of A-shares remain solid, with listed company earnings growth potentially reaching its best level in five years. Overall market valuations are attractive, and the structural overvaluation seen in the first half of the year has improved considerably. The medium-term support from global monetary order restructuring and tech-sector narratives remains intact. At this juncture, CICC believes investors need not be overly pessimistic about the A-share market's outlook, as the long-term, steady upward trend that began on September 24 is still likely to continue.
On allocation, the firm recommends: 1) Tech growth stocks, where performance hinges on sector momentum and earnings delivery. With solid fundamentals, Fed hikes may not necessarily weigh heavily on global growth stocks. A-share tech sectors are likely to diverge, requiring selective picks: AI infrastructure segments such as optical communications and PCB still have strong visibility for high prosperity this year and may see a rebound after recent weakness. In semiconductors and computing power, many companies still need scrutiny on the match between fundamentals and valuations. In innovative drugs, several companies are entering the clinical data validation phase, warranting bottom-up attention. 2) Considering geopolitical tensions and capacity cycle positioning, focus on areas with improving earnings and better supply-demand dynamics, such as grid equipment and petrochemicals. The fundamental recovery in purely domestic demand industries remains relatively slow and requires further monitoring.
Chart 1: U.S. inflation has ticked up recently, with employment data remaining strong. Source: Wind, CICC Research Department. Chart 2: Market-implied probability of this rate hike exceeded 90% before the announcement.