According to Zhitong Finance APP, GF SEC has released a research report stating that the Hong Kong stock market has recently performed excellently, with the market gradually climbing out of the profit bottom since mid-2024. After the earnings forecast for Q1 2024 hit the bottom, it has been verified by actual profit data, leading to an offensive performance for the Hong Kong stock market starting in the second half of 2024. However, it should also be noted that the valuation increase since the beginning of the year has sufficiently accounted for further profit recovery expectations this year. During the earnings report window, if there is no performance beyond expectations, there is a risk that the valuation increase trend could cool down.

GF SEC's main viewpoints are as follows:

The Hong Kong stock market has performed remarkably this year, with the valuation increase contributing to most of the gains. Taking the Hang Seng Index as an example, the index has risen by 19.4% from the beginning of the year to date, while the PE (TTM) has increased by 20.1% during the same period; actual EPS has declined by 0.56% year-to-date, and actual ROE has decreased by 0.14% year-to-date.

The flat or weakening profit indicators on the reports do not necessarily imply a market downturn. Since 2015, the correlation coefficients of actual EPS, PE (TTM), and the market performance of the Hang Seng Index have been 0.59 and 0.75, respectively, suggesting that the explanation power of valuation on the market seems to be higher. The reasoning behind this is that, unless there is a disruptive change, short-term profit fluctuations are relatively muted, or the actual profit changes require a certain feedback time; however, valuation fluctuations can be very severe.

Furthermore, fluctuations in valuation imply trading on future economic trends. If actual EPS is replaced with forecasted EPS, its explanatory power for the market will significantly increase. The correlation coefficient between forecasted EPS and the Hang Seng Index trend is 0.72. Since the beginning of this year, the market has raised its profit forecast for the next 12 months by 4.13%, which is an increase of about 10.82% compared to last year's lows; this is also a key support for the Hong Kong stock market to emerge from bear market logic.

Generally, the trend of forecasted EPS leads that of actual EPS, though there are instances of forecast errors. Often, when the profit forecast hits the bottom, it tends to drive valuation recovery and improve market performance. Two possibilities lie ahead:

1. In the first scenario, if profit recovery is confirmed, as in Q1 2016, it will raise the valuation trend—valuation will fluctuate at high levels, with actual profits driving the main rising wave of the market, resulting in larger upward movements, longer duration, and smaller pullbacks.

2. The second scenario is if profit recovery is invalidated, such as in Q4 2020 and Q4 2022, then after the valuation uplift, the market may peak and adjust, significantly killing valuations.

Returning to the current situation, it is clear that since mid-2024, the Hong Kong stock market has gradually emerged from this round of profit bottoming. After the profit forecast for Q1 2024 reached its bottom, it was validated by actual profit data, which made the performance of the Hong Kong stock market begin to show aggressiveness from the second half of 2024. However, it should also be noted that the valuation uplift since the beginning of the year has sufficiently accounted for the expectations of further profit recovery within the year. During the annual report window period, if there is no better-than-expected profit performance, there is a risk of the valuation uplift cooling down.

Risk warning: Technological progress in the industry may be less than expected; the worsening of the overseas economic situation and negative impacts from adjustments in the US stock market; changes in the international political environment bringing additional shocks, etc.