China’s stock market is grappling with worsening prospects following a lackluster earnings season, which has dampened hopes for a swift recovery in consumption—a critical factor for the world’s second-largest economy. Data from Bloomberg Intelligence reveals that earnings per share (EPS) for the MSCI China Index dropped 4.5% year-over-year in the second quarter, marking the steepest decline in five quarters. This downturn is particularly notable given the slowdown in EPS growth among the country’s eight largest tech firms, which saw a 19% increase, the slowest since late 2022.
The poor earnings performance underscores the deepening issues in China’s consumption sector, exacerbated by a persistent housing crisis and faltering growth in other areas. The ongoing economic challenges signal that the stock market is unlikely to experience a significant rebound unless the government escalates its efforts to stimulate economic recovery.
The MSCI China Index has fallen more than 13% from its peak in May, while the CSI 300 Index, a key onshore benchmark, has recorded a 5.2% decline year-to-date, positioning it as one of the worst-performing major global indices. The CSI 300 is poised for its fourth consecutive annual decline.
“The primary challenge this earnings season is the weakening domestic demand,” remarked Minyue Liu, an investment specialist for Greater China and global emerging markets at BNP Paribas Asset Management. “We need more decisive actions from Beijing, particularly measures aimed at bolstering the domestic market.”
Investors are particularly concerned about the slowdown in the consumer tech sector, which had previously been a cornerstone of China’s earnings growth. PDD Holdings Inc.’s $55 billion stock plunge last week raised alarms as the e-commerce giant, known for its low-cost offerings, issued a surprisingly pessimistic forecast. Similarly, Kuaishou Technology and Baidu Inc. experienced declines after their financial results highlighted vulnerabilities in the Chinese consumer market.
As Chinese tech giants focus on cost control to enhance profitability, investors are increasingly scrutinizing their revenue generation capabilities in a challenging environment. “The cautious sales outlook provided by many tech companies reflects persistent consumer weakness, which is currently dampening market sentiment,” noted Marvin Chen, a Bloomberg Intelligence analyst. “The deceleration in growth among China’s top tech firms may indicate that margin expansion is constrained without corresponding top-line growth.”
The earnings outlook is similarly grim for other sectors. Real estate and consumer staples firms, directly impacted by reduced purchasing power, have also reported significant declines. Major developer China Vanke Co. recorded a half-year loss for the first time in over two decades, and retailers like Li Ning Co. have revised their sales forecasts downward.
Banks are feeling the strain as well, with falling interest rates and low loan demand pushing margins to historically low levels.
This bleak earnings environment has fueled growing skepticism about the future performance of Chinese stocks. The consensus EPS growth forecast for the MSCI China Index has decreased to approximately 11% for the year, down from 15% at the beginning of the year and a peak of 16% late last year, according to Bloomberg Intelligence.
Morgan Stanley strategists, including Laura Wang, have advised caution, predicting further disappointing earnings results and downward revisions. “We maintain our cautious stance on the broad index level and anticipate a largely range-bound market,” they noted in a recent report.
