Chinese companies’ second-quarter earnings growth remains lackluster, with profits up just 1.6% year-on-year. Financial firms lead modest gains, while non-financial sectors suffer losses. Analysts warn that sustained market gains depend on an earnings recovery. Government cooling measures are being considered as concerns over a $1.2 trillion rally grow.

Non-financial firms’ second-quarter profits fell 1.6% year-on-year, with deflation and a struggling property market to blame. Factory activity, investment, and retail sales disappointed in July. Analysts caution that sustained market gains hinge on an earnings turnaround.

Chinese government intensifies “anti-involution” campaign to combat overcapacity and disorderly price competition. Carmakers like BYD Co. and solar equipment manufacturers like JA Solar Technology Co. struggle with oversupply. Analysts predict slow improvements for deflation as companies face tough market conditions.

Financial firms and AI-related companies shine amidst bleak earnings season. Chip designer Cambricon Technologies Corp. posts record profits in the first half, driven by surging demand for chips in the AI sector. Market liquidity continues to drive demand for equities, but caution is advised due to companies’ performance.

Read more at Yahoo Finance: Chinese Earnings Point to Fragility of $2.7 Trillion Stock Rally