China's Equity Surge Fails to Ignite Wall Street's Enthusiasm

The sudden frenzy that has pushed Chinese equities to a bull run has barely registered with US traders, underscoring both China's limited role as an engine for America's economy and skepticism that Beijing policymakers will be able to fix deep-seated growth woes.

Diverging Fortunes: China's Resurgence and America's Steady Climb

China's Equity Surge: A Regional Affair

While the CSI 300 Index has jumped more than 8% in recent trading, the S&P 500 has only risen by a relatively meager 1%, underscoring how traders in US assets are largely shrugging off the gambling spirits in Asia. This newfound market enthusiasm remains a largely regional affair, with foreign investors rushing to replenish US-listed funds that ride Chinese large-cap companies, technology shares, and more, after a spate of policy-easing measures in the nation, including the relaxing of rules on home buying.

US Stocks Outshine Asian Counterparts

US stocks have crushed their Asian counterparts again this year – and for most of the post-pandemic era, for that matter – while Beijing's efforts to jumpstart the economy have been met with persistent doubts after repeated policy failures. Even if China's leaders pull off the feat, how much America will benefit remains an open question given the fact its output is notably less dependent on trade growth than many of its advanced-economy peers, while China was just surpassed by Mexico as the top US trading partner.

Domestic Factors Drive US Market Outlook

With the S&P 500 fetching a near-record valuation premium recently over its Chinese counterparts, investors are turning their focus to domestic factors to determine the outlook, including the continued resilience of American consumers and the Federal Reserve's interest rate-cutting trajectory. This contrasts with the challenges facing China, from a property crisis to deflation, slowing growth, and rising youth unemployment, which are not going away soon.

China's Equity Rally: Fueled by Short Sellers

The latest gains in Chinese stocks have been fueled by short sellers, who had bet against the market and were forced to buy back shares to limit losses. However, when measured from its 2021 high, the CSI 300 remains 30% lower, and the nation's deeply distressed real estate sector and consumer malaise are yet to be resolved.

US Markets Ride the AI Frenzy and Fed's Balancing Act

In contrast, US markets have rallied hard all year, thanks to the S&P 500's steady march higher amid the frenzy over artificial intelligence, and as the Fed manages to tame inflation without snuffing out growth, at least for now. The index has notched more than 40 record highs this year, sitting 70% above its pre-pandemic peak, and earlier this month, the S&P 500 was traded at 25 times earnings — two times as high as its Chinese counterpart.

Cautious Outlook for US Equity Gains

According to Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs Group Inc., equity gains may be hard to come by in the US until after November's presidential election. This may well help explain why American investors have sought out cheaper investing styles of late, including Chinese ETFs, as the "S&P is not the horse to ride this October."