Wall Street in August 2026 presents a scene of extreme polarization. On one hand, tech giants related to Artificial Intelligence (AI), driven by capital expenditure, are breaking historical valuation extremes, attracting frenzied global capital; on the other hand, as the Federal Reserve's high interest rate policy persists, many high-quality companies in traditional industries are being mispriced by the market due to liquidity contraction, with stock prices hovering at historical lows. For readers of ZhengQuanKa, this market environment is fraught with risk but also breeds huge opportunities. Beyond the noisy AI narrative, returning to the roots and applying classic value investing stock selection strategies may be the best compass to navigate the current cycle of volatility.

Macro Background: The "Valuation Dual-Track System" in the High-Interest Era

Entering the second half of 2026, the US macroeconomic environment remains complex. Although inflation data has retreated from previous highs, the stickiness of core inflation keeps the Fed cautious on rate cuts. This expectation of "Higher for Longer" has directly led to a reconstruction of asset pricing logic.

Against this backdrop, the US stock market has formed a clear "valuation dual-track system." For tech growth stocks, the market is willing to grant valuations far exceeding current profitability, betting on excess cash flows brought by future technological monopolies; for traditional value sectors like finance, industry, and energy, due to the rise in discount rates (interest rates), the discounted value of future cash flows is heavily discounted, leading to long-term sluggish stock prices. However, this irrational divergence precisely provides value investors with a rare "hitting zone."

The core of value investing lies in the "deviation between price and value." When the market overly chases the future and ignores the present, companies with stable cash flows, high dividend yields, and valuations at historical lows possess an extremely high margin of safety. This is not simply about buying cheap goods, but finding the anchor of highest certainty in an uncertain macro environment.

New Connotations of Value Investing in 2026: From Low PE to High Quality

Traditional value investing is often simply equated with low Price-to-Earnings (P/E) strategies. However, in the 2026 market environment, relying solely on low PE for stock selection is no longer sufficient to avoid risks. Many low PE companies may be in the recession phase of the industry cycle, facing the risk of a "value trap." Therefore, we need to redefine the current value investing stock selection criteria, placing "quality" at the core.

1. The Dominance of Free Cash Flow

In a high-interest rate environment, financing costs are high, and a company's ability to generate its own blood (self-sufficiency) is crucial. When selecting stocks, we should prioritize companies capable of generating strong Free Cash Flow (FCF). Free cash flow is not only the source for debt repayment, stock buybacks, and dividends, but also the confidence for a company to survive during economic downturns. Especially companies that can convert free cash flow into high shareholder returns (through dividends or buybacks) are more attractive in the current market.

2. Sustainability of the Moat

Buffett once emphasized the importance of the "moat." Today, with rapid technological changes, traditional moats (such as brand effects) may be quickly dismantled by AI technology. Therefore, value stock selection in 2026 should focus more on competitive advantages that are hard to be easily disrupted by technology, such as unique regulatory licenses, irreplaceable geographic resources, or switching costs deeply embedded in customer business processes. We need to look for traditional enterprises that are not only unimpacted by the AI wave but can also use new technologies to reduce costs and increase efficiency.

3. Health of the Balance Sheet

With interest rates remaining high, corporate financial leverage becomes a double-edged sword. Value investors must strictly scrutinize corporate balance sheets and avoid highly indebted companies with excessive interest expense pressure in a high-interest environment. Conversely, companies with net cash and low capital expenditure needs actually play the role of "bond substitutes" in a high-interest environment, possessing extremely strong anti-risk capabilities.

Industry Sector Analysis: Gold Hidden in Forgotten Corners

Based on the above criteria, we turn our attention to several industry sectors that are currently relatively undervalued by the market but have solid fundamentals.

Financials: Mismatch between Valuation and Expectations

Although the banking industry went through the baptism of a regional crisis in 2023, after two years of risk clearing and asset restructuring, the balance sheets of large regional banks and comprehensive investment banks have significantly strengthened. Currently, the Price-to-Book (P/B) ratio of the US banking sector is generally below 1x, meaning investors are buying these assets at prices below book value. With the stabilization of net interest margins and the improvement of credit quality, the financial sector possesses high potential for valuation repair. In particular, top institutions focusing on wealth management and investment banking businesses, benefiting from increased capital market activity, are worth expecting for profit elasticity.

Industry and Energy: The Return of Real Assets

Against the backdrop of global supply chain reconstruction and energy transition, the strategic status of the industrial and energy sectors is becoming increasingly prominent. The market once worried that long-term demand for fossil fuels had peaked, leading to long-term compression of energy stock valuations. However, reality shows that the resilience of energy demand exceeded expectations, and supply chain bottlenecks mean pricing power for upstream resource commodities remains in the hands of a few giants. For the industrial sector, the US "re-industrialization" policy has brought long-term demand for equipment updates and infrastructure construction, especially for enterprises involved in precision manufacturing and electrification equipment, whose order visibility is extremely high.

Healthcare: The Combination of Defense and Growth

The healthcare industry has historically been a safe haven during economic recessions. With the intensifying trend of population aging, the demand for healthcare services has rigid characteristics. Currently, the valuations of some large pharmaceutical companies and medical device manufacturers do not reflect the long-term value of their R&D pipelines. Compared to the high volatility of tech stocks, the healthcare sector offers stable dividend growth and moderate earnings growth, serving as a cornerstone for building defensive asset allocations.

Practical Strategy: Steps to Build a Value Portfolio

After clarifying stock selection criteria and industry directions, how do we translate these theories into an actual investment portfolio? The following is a practical operation framework suitable for the 2026 market environment.

• Quantitative Screening Preliminary Filter: First, use quantitative indicators to screen out a pool of stocks that meet the criteria. For example, set the P/E ratio more than 15% below the industry average, dividend yield higher than the S&P 500 average, and companies with a compound annual growth rate of free cash flow exceeding 10% over the past five years. This helps us quickly eliminate obviously overvalued targets.
• Qualitative Analysis Deep Dive: Conduct in-depth fundamental research on the screened targets. Focus on reading the Management Discussion and Analysis (MD&A) section of financial reports to judge whether management is honest and rational, and whether capital allocation is efficient. Pay special attention to the company's coping strategies during industry headwinds, as this is the touchstone for testing corporate competitiveness.
• Valuation Model Verification: Do not rely solely on relative valuation indicators (such as PE, PB), but combine with the Discounted Cash Flow (DCF) model for absolute valuation. In the DCF model, adopt a conservative discount rate (considering the current high-interest environment) and cautious growth assumptions. Only consider entering when the current stock price is significantly lower than the conservatively estimated intrinsic value.
• Batch Building and Patient Holding: After confirming the target, avoid buying a heavy position all at once. Considering the repeated fluctuations in market sentiment, adopt a strategy of building positions in batches, gradually adding positions when stock prices fall to lower the average holding cost. Value investing is a game of patience; the journey from undervaluation to value return often takes months or even years, and investors need to be psychologically prepared for long-term holding.

Risk Warning: Beware of Value Traps

In the pursuit of low valuations, we must remain vigilant at all times to avoid falling into "value traps." A so-called value trap refers to companies that look cheap but whose fundamentals are continuously deteriorating, leading to lower and lower valuations.

Common value trap signals include: continuous decline in revenue without increase in market share, continuously narrowing gross margins, frequent changes in senior management or accounting policies, and industries on the edge of technological obsolescence. For example, certain traditional retail companies, although having extremely low P/E ratios, are seeing their core business irreversibly eroding under the impact of e-commerce and AI personalized recommendations. For such companies, no matter how cheap the price, they should be avoided. Value investing buys "discounted future cash flows," not "the lingering shadow of past glory."

Conclusion: Returning to the Essence of Investing

The US stock market in August 2026 is filled with noise about AI, geopolitics, and interest rate paths. For short-term traders, this is a nightmare-like volatility environment; but for determined value investors, this is the hotbed for obtaining excess returns.

By adhering to the value investing stock selection strategy, we no longer try to predict tomorrow's Fed speech or next month's non-farm payroll data, but focus on the intrinsic value of enterprises. We buy high-quality assets that are misunderstood by the market and mispriced by sentiment, and grow together with the enterprise. In the fear of bursting bubbles, maintain rationality; in the loneliness of being unasked for, stick to faith. This is not only the art of investment, but also the necessary path for wealth accumulation. As Benjamin Graham said: "Investment is based on detailed analysis, promising the safety of principal and a satisfactory return. Operations that do not meet these requirements are speculative." In the present of 2026, let us return to the essence of investing and be friends with time.