AI Development: Health Check
Chart of the Week:
ChiNext Seeks China Hardware Opportunities
Global demand for technology hardware is rising, with China’s high-tech exports increasing 40% year-on-year – the highest level since the post-COVID recovery. Over the past 25 years, the fastest growth period was in 2004. Despite China’s participation in high-tech exports, traditional large-cap indices such as the Hang Seng Index and MSCI China Index remain relatively underweight in hardware suppliers, while internet giants dominate – a situation similar to the U.S. Currently, technology-related companies account for a significant share of the S&P 500, with four major cloud service providers (CSPs) representing about 17%.
Market Recap 1:
Ceasefire and Nuclear Memorandum Support, Tech Rally Drives Market Performance
On Thursday (May 29), the U.S. and Iran reached a preliminary consensus on a 60‑day ceasefire and nuclear negotiation memorandum, supporting overall risk assets, with semiconductor indices posting the strongest gains. Meanwhile, oil prices and U.S. Treasury yields fell in tandem, easing market concerns over inflation and high interest rates, and bolstering small‑cap and cyclical stocks.
Market Recap 2:
Preliminary Ceasefire and Nuclear Talks Consensus, Bond Prices Rise, Oil Prices Fall
U.S. April PCE data showed a YoY increase of 3.8%, in line with market expectations. Core PCE rose 3.3% YoY, also matching forecasts. Driven by higher energy prices during the Iran war, April inflation recorded the fastest pace in nearly three years. Ahead of the release, markets had already priced in expectations of inflation staying elevated, with no further rate cuts anticipated this year. The probability of a 25bp hike by year‑end remained at 37.5%. Two‑year yields were little changed, while longer‑term yields fell on ceasefire hopes.
What’s Trending:
Diversified Portfolio Mitigates Concentration Risk
Market sensitivity to Middle East conflicts has gradually declined, while strong AI demand continues to support related concept stocks, driving notable gains. From a portfolio perspective, allocations may increasingly tilt toward AI‑related equities, raising concentration risk. However, global liquidity remains abundant and recession risks are relatively low. We believe investors should stay invested, with a long‑term positive view on technology, AI semiconductors, and related themes.
In Focus 1:
AI Health Check: Components Drive CSP CapEx; NVIDIA’s Client Broaden
The five major cloud service providers (CSPs), as key AI application players, continue to support the hardware sector through capital expenditure. Recent data show a positive trend, with 1Q26 CapEx by the top five CSPs rising 91% YoY and 14% QoQ to USD 148.4 billion, exceeding market consensus. However, free cash flow has continued to decline sequentially. One driver of the CapEx revision is higher component costs, particularly memory prices.
In Focus 2:
Long-Term Memory Contracts Enhance Future Revenue Visibility
On the other hand, tight memory supply and sharp price increases have strengthened memory producers’ pricing power. Last week, Micron’s share price rose, driven by the signing of long‑term supply agreements across the industry, which lock in part of shipment volumes and prices. UBS expects such agreements to cover an increasing share of DRAM capacity. These contracts include both fixed and floating prices as well as volume commitments, reflecting buyers’ expectations of rising memory prices and persistent supply shortages.
