CICC: Why Have Earnings Trajectories Diverged Across US, A‑Share, And Hong Kong Markets?

Over the past week, developments in Iran have trended toward de‑escalation, which aligns with the prevailing baseline assumption underpinning most asset valuations; absent this expectation, markets would likely have experienced far greater turbulence. While negotiations remain uncertain and the fragile balance could be disrupted again, the working view remains that short‑term volatility is probable, April is a critical month, but a full‑scale loss of control is not the base case.

Given this backdrop, a more actionable focus than speculating on directional moves is assessing how fully different assets have priced in adverse scenarios. That assessment informs allocation decisions: investors with light exposure can consider adding to assets that already reflect pessimism, those with heavier exposure may trim into lower‑volatility dividend plays or reduce risk, and consensus trades such as energy storage, green power and coal—already widely held—should be approached with caution to avoid chasing crowded positions. Recent market behavior has broadly reflected these dynamics.

A striking observation over the past month is the divergence in consensus earnings revisions across the three markets facing the same Iran shock and higher oil prices. U.S. equities have seen upward revisions, A‑shares have been broadly unchanged, and Hong Kong equities have experienced downward revisions. Since late February, FactSet consensus shows forward 12‑month EPS expectations for Nasdaq, the S&P 500 and the Dow Jones rising by 5.6%, 5.0% and 2.2% respectively. By contrast, the CSI 300 is up 1.6% while the MSCI China A‑share index is down 0.1%. Hong Kong benchmarks have weakened most, with the Hang Seng, MSCI China ex‑A and MSCI China indices’ 12‑month forward EPS down 1.3%, 1.9% and 3.0% respectively.

Sector‑level analysis helps explain the divergence. Upstream energy and materials sectors have seen earnings upgrades across markets, but the magnitude is larger in the U.S. According to FactSet consensus, U.S. energy sector 12‑month forward EPS rose 35.2%, compared with 13.1% for A‑shares and 10.1% for Hong Kong. Materials sector upgrades were 12.5% in A‑shares, 7.9% in Hong Kong and 5.4% in the U.S. Conversely, several mid‑ and downstream sectors in A‑shares and Hong Kong have been downgraded. Hong Kong technology growth and consumer sectors recorded notable cuts: consumer services, semiconductors, tech hardware, telecom services and discretionary retail saw 12‑month forward EPS revisions of ‑15.1%, ‑14.1%, ‑13.7%, ‑10.1% and ‑7.6% respectively. A‑shares experienced downgrades in real estate (‑88.4%), autos and parts (‑10.6%), telecom services (‑7.4%) and medical equipment and services (‑6.9%). U.S. downgrades were more limited, concentrated in transportation (‑2.9%) and durable goods (‑2.2%).

Even within identical sectors, the direction and magnitude of revisions differ materially across markets. The semiconductor sector’s 12‑month forward EPS rose 18.4% in the U.S., fell 1.8% in A‑shares and declined 14.1% in Hong Kong. Tech hardware EPS increased modestly in the U.S. and A‑shares but fell sharply in Hong Kong. Consumer services showed small gains in the U.S. and A‑shares while Hong Kong recorded a substantial downgrade.

Two principal factors explain these cross‑market differences. First, the transmission of an energy shock exhibits a timing lag: upstream resource producers react quickly to price moves, while downstream firms benefit from buffers such as inventories, substitution, pass‑through mechanisms and existing orders, so their earnings impact may materialize with a delay. The data reflect this pattern: upstream energy and materials earnings have been revised upward across markets, whereas downstream adjustments are not yet uniformly evident. If the supply shock persists, downstream sectors face the risk of subsequent downward revisions.

Second, structural differences in market composition amplify the divergence. The U.S. benefits from being a major energy producer and exporter, so higher oil prices translate into greater earnings elasticity for U.S. oil and gas firms; this has driven a larger upward revision in U.S. upstream earnings and contributed materially to the S&P 500’s aggregate EPS upgrade, offsetting limited downgrades elsewhere. A‑shares are roughly balanced, with upstream upgrades offsetting some downstream weakness. Hong Kong’s relative weakness stems from concentrated downgrades in heavyweight downstream sectors—particularly technology and consumer names—where earnings cuts for large constituents such as Alibaba, Tencent and Xiaomi (01810.HK) have weighed on the overall index, even though those downgrades are not primarily driven by the energy shock itself.

Looking ahead, the medium‑term earnings outlook across the three markets will depend on the interaction of the Iran trajectory, credit cycles and structural industry trends. Under the baseline scenario of gradual de‑escalation, consensus currently projects 2026 earnings growth of 18.2% for U.S. equities, 11.2% for A‑shares and 5.5% for Hong Kong. For the U.S., a calming of geopolitical tensions and easing oil prices could support Federal Reserve easing and fiscal stimulus, sustaining credit‑cycle repair; however, we estimate 2026 U.S. earnings growth nearer 12–14%, below current consensus, and we have adjusted our year‑end S&P 500 target range from 7,600–7,800 to 7,100–7,200 to reflect the delayed credit‑cycle recovery and near‑term oil‑price headwinds. For China, absent a marked external demand shock prompting policy easing, the credit cycle is likely to remain range‑bound and broad earnings improvement is unlikely; we estimate 2026 A‑share earnings growth of 4–5% (non‑financial +8%, financial +1.6%), below consensus, and Hong Kong earnings growth of roughly 3–4% (non‑financial +6–7%, financial near zero). Under these assumptions, the Hang Seng Index baseline range is 28,000–29,000, constrained by a tepid Chinese credit cycle and seasonal weakness in Q2.

In a downside scenario where oil prices remain elevated around USD 100 into the third and fourth quarters, the earnings impact would be materially larger than current pricing implies. If the oil‑price midpoint rises 50% year‑over‑year, our estimates suggest U.S. corporate profits could decline by roughly 9%, reducing growth to the low single digits, while Chinese corporate profits could fall by about 12%, turning negative. Such outcomes would likely trigger significant re‑rating across risk assets and could produce double‑digit drawdowns in U.S. equities and deeper pressure in Chinese and Hong Kong markets, depending on valuation and earnings exposure.

Short‑term market behavior has been dominated by sentiment and event risk, making single‑direction bets hazardous; news flow and geopolitical developments can reverse market moves within days. A more robust approach is to evaluate how fully different assets have priced in rate cuts and downside scenarios, and to position accordingly. Currently, fixed income, gold and copper reflect relatively pessimistic pricing, while equities have not fully discounted adverse outcomes except in segments that have already experienced large declines, such as Hang Seng Tech. CME futures have shifted expected rate‑cut timing modestly, and decomposing rate‑cut expectations across assets reveals variation in how much easing is priced in. Assets that have already priced in substantial pessimism—U.S. Treasuries, gold and certain deeply sold equity segments—may offer asymmetric upside if the situation calms.

From a sector rotation perspective, short‑term scoring favors biotechnology, non‑ferrous metals, chemicals, building materials and steel on earnings, valuation and flows. Banks, oil and gas, and coal retain solid fundamentals but lower short‑term flow scores, making them more suitable as medium‑term core holdings or left‑side allocations. Over the medium term, as geopolitical risk recedes and sentiment normalizes, allocation decisions should revert to earnings prospects: technology, cyclicals and selected resource sectors show stronger 2026 earnings growth potential, while some consumer segments remain under pressure.

In summary, under three core assumptions—that a full breakdown of the Iran situation is not the base case, that episodic volatility remains possible, and that China’s credit cycle is seasonally weak in Q2—we recommend a layered allocation approach. Investors with low exposure can add to assets that already reflect pessimism and are closely tied to rates and risk appetite, such as Hang Seng Tech, gold and innovative pharmaceuticals. Investors with higher exposure may modestly reduce risk or rotate into low‑volatility dividend names to preserve capital. Holdings that benefit from supply shocks and energy‑security narratives, including storage and green power, remain valid strategic positions but should not be chased at elevated consensus valuations. Across all scenarios, prioritizing positions that reflect how fully expectations are priced will provide a more disciplined response to the evolving geopolitical and macroeconomic landscape.