A $439 billion rally in China’s tech megacaps has seen them dramatically outperform their U.S. counterparts, with many investors now believing that the Chinese tech sector still has plenty of room to grow.
An equal-weighted basket of China’s top seven tech companies, including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. — collectively dubbed the “7 titans” by Societe Generale — has surged over 40% this year. This marks a stark contrast to a roughly 10% drop in the U.S. “Magnificent Seven” stocks, which has also pushed the Nasdaq 100 Index to the brink of a correction.
This sharp reversal in fortunes has caught Wall Street off guard. Just months ago, the Nasdaq was setting record highs, while Chinese stocks were still grappling with the aftermath of years of regulatory crackdowns and a sluggish recovery in consumer spending. But a sudden shift in market sentiment — spurred by the success of DeepSeek and China’s strides in AI development — has led to a rapid rebound for Chinese tech stocks.
“The success of DeepSeek, followed by a wave of new AI models from China, has reminded the world that China’s innovation potential shouldn’t be underestimated despite U.S. chip export restrictions,” said Charu Chanana, Chief Investment Strategist at Saxo Markets. “The momentum in China’s AI sector has room to run, especially considering its valuation discount.”
The Chinese tech sector, which also includes companies like Xiaomi Corp., BYD Co., Semiconductor Manufacturing International Corp., JD.com Inc., and NetEase Inc., is now trading at 18 times forward earnings, over 40% cheaper than the U.S. tech giants, according to a report from Societe Generale.
The Hang Seng Tech Index, which tracks major Chinese tech companies, gained more than 1% on Friday, bringing its weekly increase to about 10%. The index is now at its highest level since late 2021.
While Chinese equities are seeing a resurgence, U.S. stocks are grappling with multiple challenges. The narrative of unstoppable U.S. equity rallies, driven by “American exceptionalism,” is being tested by President Donald Trump’s disruptions to global trade, which have caused unease among American businesses and consumers due to tariffs.
Additionally, after years of booming growth, U.S. big tech stocks, including Nvidia, are facing scrutiny over their lofty valuations, with investors demanding higher earnings to justify the high prices.
Despite lingering concerns about China’s market volatility, geopolitical tensions, and policy uncertainty, the country is increasingly seen as a viable alternative to U.S. stocks. The Hang Seng Tech Index still sits about 40% below its 2021 peak, and its five-year return of approximately 18% is a fraction of the Nasdaq 100’s 130% rally during the same period. However, with valuations on U.S. tech stocks reaching sky-high levels and concerns over their sustainability, many investors are shifting focus to China.
“The drivers for Chinese tech to outperform are in place, including strong government support, recovering earnings, and structural growth themes like AI,” said Vey-Sern Ling, Managing Director at Union Bancaire Privee. “U.S. tech valuations have surged for two years, and now, combined with earnings disappointments and macroeconomic factors, we’re seeing a rotation out of U.S. stocks and into China and Europe.”
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