AI revolution, reordering of the geopolitical landscape, weakening of the US dollar's credibility—why are the "three major narratives" so prevalent?

In traditional market analysis frameworks, we usually focus on three core drivers: Fundamentals (real macroeconomics, industry cycles, corporate earnings, etc.), Risk Appetite (policy changes, events, etc.), and Liquidity (fund size, structure, trading congestion). Among these, fundamentals remain central in the long term; they directly influence corporate earnings expectations on the numerator side, and also affect market sentiment and risk appetite, while also impacting liquidity environments through monetary policy.

However, in recent years, we have observed that markets are increasingly dominated by narratives, exhibiting several distinct features:

First, divergences between the market and fundamentals occur periodically, and market volatility can far exceed fundamental expectations, even diverging in direction;

Second, global capital reallocation tends to amplify narrative effects, with capital flows often showing convergence, leading to crowded trades;

Third, volatility is significantly amplified and often nonlinear, where small events can trigger intense shocks;

Fourth, correlations among different asset classes change, breaking traditional low or negative correlations (e.g., stocks, bonds, commodities, currencies), making asset allocation and risk hedging more challenging.

Why are narratives starting to dominate markets? We believe the key lies in the reflexivity created by the “AI revolution, reconfiguration of geopolitical order → narrative evolution → AI dissemination & attention scarcity → capital inflows” chain, forming a self-reinforcing cycle in the AI era.

First, the three major global narratives—AI revolution, geopolitical order reconfiguration, and weakening of US dollar credit

Narratives can be divided into small and large ones. Historically, small narratives are plentiful, such as the impact of “Internet+” around 2015 on certain tech stocks, or the “New Energy” theme in 2021 boosting related sectors. Small narratives tend to have limited scope, affecting specific assets or sectors, and are usually short-lived; once the narrative weakens, they fade quickly. Currently, we face three super narratives simultaneously, with unprecedented scale and complexity.

(1) The AI revolution is a Kondratiev wave-level long cycle, capable of overshadowing many smaller economic cycles, far beyond traditional cycle explanations.

• First, from current investment scales, U.S. tech firms’ capital expenditure as a share of GDP is already about 1.9% in 2025, expected to rise above 2% in 2026, with global increases in AI capital spending.
• Second, AI’s contribution to growth is not just industry-specific; it enhances total factor productivity. According to our April 2025 report “AI: A New Wave of Scientific Revolution Changing the World,” it could contribute 0.5-1.5 percentage points to global potential GDP growth over the next decade.
• Third, from a macro paradigm perspective, AI differs from previous technological revolutions—shifting from auxiliary to substitutive roles for labor—an unprecedented transformation in depth and breadth.
• Fourth, market performance shows that the AI revolution causes intense structural differentiation, with beneficiaries like computing power chains and capex-related stocks performing far beyond traditional macro explanations.

The impact of the AI revolution will be enormous, but its specific path remains unpredictable—its boundaries, new business models, scenarios, and industries are all uncertain. Markets tend to price long-term, uncertain prospects into current asset prices.

(2) Reconfiguration of geopolitical order is mainly speculative and difficult to generalize.

The ongoing geopolitical reordering has significant impacts, but it is also the most unpredictable factor. Analysis of geopolitical events relies heavily on assumptions and hypotheses, making it hard to draw inductive conclusions. This unpredictability is evidenced by ongoing events like Russia-Ukraine, US-Israel-Iran tensions, which confirm the inherent unpredictability of geopolitical risks.

(3) Weakening of US dollar credit prompts global capital to seek reallocation directions.

Moreover, narratives can reinforce each other; even small narratives strengthen larger ones. For example, industries like new energy, semiconductors, and rare earths have gained strategic importance amid geopolitical competition, elevating from industry cycles to national strategies, creating a more unified macro narrative. This integration further amplifies market consensus.

Second, the production and dissemination of AI-related information

During the 2015 bull market, new media accelerated information flow, fueling thematic rallies, with investors making decisions based on various opinions and stories, often neglecting fundamentals.

Today, AI technology further transforms information dissemination—enhancing narrative power, reducing content creation costs, and speeding up spread. For example:

• AI reduces content creation costs; producing a high-quality analysis used to take significant time, but now AI can generate professional-looking articles in minutes, leading to explosive growth in market content.
• AI algorithms can precisely push narratives tailored to investor preferences, prioritizing engaging content, and combined with new media, this accelerates information spread.

Content generation costs approach zero, and dissemination speeds grow exponentially. As a result, grand narratives spread faster and more broadly, forming consensus more quickly, driving capital flows, and increasingly influencing markets.

Third, investor attention becomes a scarce resource.

In an era of information overload, investor attention is the most limited resource. Among thousands of stocks and countless macro paths, the most prominent are those driven by the “largest, most consistent” narratives. This creates an “information cocoon,” where investors are guided by algorithms and biases, focusing only on certain topics and assets. This attention scarcity and concentration attract substantial capital inflows.

These factors reinforce each other, creating reflexivity in the AI era. Traditional Soros reflexivity posits a bidirectional, cyclical relationship between market participants’ perceptions and market reality, where prices reflect fundamentals but also influence them, leading to long-term disequilibrium. In the AI era, this reflexivity is magnified: lower narrative costs, faster evolution, quicker consensus, and easier capital feedback loops mean that stronger narratives attract more funds, pushing prices higher, which further reinforces narratives and valuations.

For example, AI narratives and tech giants’ fundamentals can self-reinforce: AI narratives attract capital into tech stocks, boosting valuations, which then enables more capital expenditure and better financing conditions, improving short-term fundamentals, thus reinforcing the narrative. Similarly, prediction markets like Polymarket generate probability expectations through individual trades, influencing market sentiment and attracting more capital, further strengthening market consensus.

This reflexivity creates a powerful feedback loop but also increases the potential for market mispricing and risks:

• First, do not conflate narratives with reality. Narratives are about future expectations, often diverging from actual fundamentals. When reality lags behind (e.g., energy shortages, investment returns), narratives may weaken temporarily—such as the recent market shift away from rewarding tech giants’ capital expenditure.
• Second, avoid linear extrapolation. Market changes driven by narratives are often nonlinear, with “singularities” or “diminishing returns.” Geopolitical events can only be projected, not fully generalized, reducing the effectiveness of linear forecasts.
• Third, distinguish short-term trading from long-term allocation. Some narratives are correct but do not guarantee continuous rises. Reflexivity can cause prices to deviate from fundamentals, with markets pricing in extreme scenarios. High valuations and crowded trades are vulnerabilities. When narratives change marginally, positive feedback can turn negative, causing liquidity shocks. Buying at narrative peaks may not be profitable and could lead to short-term losses.

How should investors respond to a narrative-driven market? Here are some considerations:

First, develop an AI-era trading framework. Don’t rely solely on fundamentals (“flag waving”); also monitor “wind” and “heart,” which can be even more critical. A simple approach:

1. When fundamentals are weak but narratives are strong, focus on trading opportunities.
2. When fundamentals are strong, narratives are weak, and congestion is low, adopt a “slow bull” stance.
3. When both fundamentals and narratives are strong, and congestion is high, assess whether prices are overextended.
4. When both are weak, look for other opportunities.

Second, be prepared to “know when to retreat” or even “counter-trend.” Even if a long-term narrative is correct, when consensus is extreme and capital is crowded, beware of reflexive peaks. Setting clear exit rules—based on valuation percentiles, capital flows, and trading structures—is crucial. When trading structures are extremely crowded and narratives no longer attract incremental attention, even good fundamentals may not prevent risks. Conversely, once valuations are digested and long-term narratives remain intact, it may be an opportunity to re-enter.

Third, track and adjust. Focus on marginal changes; when narratives show signs of change, adjust positions accordingly. Key signals include:

• Policy shifts (regulatory, industry, monetary)
• Major industry news (capital expenditure validation, physical bottlenecks)
• Changes in competitive landscape (new entrants, technological breakthroughs, disruptive applications, market share shifts)

Monitoring tools include valuation, volatility, trading structure, and sentiment indicators, as well as participation metrics (e.g., retail influx, media coverage).

Fourth, narratives ultimately require fundamental validation. Fundamentals remain the long-term “anchor” and “weighting machine.” Narratives are not one-off bets but involve iterative “story-verify/ falsify—narrative reinforcement/weakening—re-verify” cycles. Regular fundamental checks are essential for narrative correction, along with ongoing data tracking. Besides AI and geopolitical narratives, maintain a portion of your portfolio in assets with verifiable earnings, cash flows, and reasonable valuations—non-narrative sectors with stable fundamentals as hedges.

In summary, we are currently in a superimposed environment of four major narratives: AI revolution, geopolitical reordering, weakening of US dollar credit, and the transition of China’s old and new growth drivers. These form the core of our recent cognitive alpha exploration. Narratives influence market sentiment and capital flows, magnify asset prices, and even impact fundamentals through reflexivity.

If in recent years we concluded “debt over stocks” based on the “new-old growth transition,” now, amid the “AI revolution,” we are optimistic about tech growth opportunities. Meanwhile, geopolitical reordering suggests increased defense spending, strategic reserves, resource and consumable industries, and promotes diversification of global FX reserves and precious metals.

In this environment,

The traditional Merrill’s “growth + inflation → monetary policy → asset prices” clock framework is invalid.

Instead, we see:

Grand narratives (the major themes above) + paradigm shifts (efficiency vs. safety, monetary vs. fiscal) + AI dissemination modes → new “dumbbell” portfolios (transformative tech, non-renewable resources and consumables) + multi-asset rotation + cognitive alpha + positive correlations.

Source: Huatai Securities

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Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situations, or needs. Users should determine whether any opinions, views, or conclusions herein are suitable for their circumstances. Investment is at their own risk.