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Only two factors deliver returns when it comes to investing in stocks. While most investors would stop at the simple fact that a price goes up and realizes a profit, they fail to understand how that stock price goes up in the first place. One of the two factors is valuation multiple expansion, as measured by the commonly known price-to-earnings (P/E) ratio.
The second factor is earnings per share (EPS) growth, which directly affects company trades.
Considering these two, future expectations are of considerable importance, as companies with significant future potential EPS growth will typically command higher P/E multiples. The problem arises when EPS growth slows and P/E multiples continue to expand, which is precisely what happens in the S&P 500 and Nasdaq-100.
Most of the EPS share of these indexes is centered in the technology sector, which now carries trillions in market capitalization. Still, with slowing growth rates, the share of price appreciation is tilting more and more toward the P/E side of the equation.
This is why investors need to diversify toward the other end, EPS growth, and why companies in the KraneShares CSI China Internet ETF are today’s best gold mine for future returns.
Why Chinese Stocks?
Compared to technology stocks in the United States, Chinese technology companies have seen minimal P/E expansion, yet continue to deliver EPS growth rates above those of their American counterparts. With this dynamic in place, it’s challenging not to envision a future where China outperforms, especially in the realm of technology companies.
As a more direct and diversified comparison, investors can look to the iShares MSCI China ETF, which currently has a valuation of 14.4x and has experienced massive underperformance in terms of price compared to the S&P 500 index over the past five years.
On the other hand, the S&P 500 now trades at roughly 25.0x, nearly double the valuation of its Chinese counterpart. The key difference maker to consider here is the underlying EPS growth, representing the world’s two largest economies.
Investors can simply use the top holdings as a direct representation to get a more accurate picture than the distorted indexes that overweight the best-performing stocks. For the S&P 500, this is NVIDIA Corporation (NASDAQ:NVDA). This company now forecasts an EPS growth rate of 8.6% over the next 12 months, as Wall Street expects $0.88 in EPS compared to today’s $0.81.
Contrasting the S&P 500 and NVIDIA valuation to EPS growth setup, investors can look to the Chinese index’s largest holding, Tencent Holdings Ltd (F:NNND)., and its forecasted 16% EPS growth for the next 12 months, nearly double at only half the valuation.
However, Tencent is an “over the counter” stock, which might add to the nervousness some investors feel when it comes to buying Chinese companies. The index’s second-largest holding can help alleviate these fears, as it is Alibaba (NYSE:BABA) Group, a well-known name in commerce and cloud computing among many American investors.
Alibaba trades at a P/E ratio of roughly 11.0x and boasts an EPS growth expectation of 14% for the next 12 months, creating a significant divergence between the drivers behind American and Chinese stocks and their respective indexes. This is not to say the S&P 500 is a bad place to be, but rather that for those who manage their capital, China might be a good place to start diversifying.
China’s Best Choice: Alibaba Stock
Not only is Alibaba one of China’s blue-chip names, but it is also exposed to some of the best industries and businesses, which act as a major tailwind for the entire Chinese economy. With an arm in the consumer discretionary space, Alibaba’s exposure to a quickly growing middle class acts as a significant growth area, but that’s not all.
The company’s cloud computing segment, which is expanding across Asia and the Middle East, is positioning itself early in the data center and artificial intelligence landscape within economies that are expected to experience the largest GDP per capita growth in the coming years.
This is why some analysts, like Gary Yu from Morgan Stanley, see Alibaba valued as high as $180 per share today. While this view calls for a new 52-week high to be broken, delivering as much as 50% upside potential, this view doesn’t even come close to Alibaba’s all-time high of just over $310 per share.
What’s even more interesting is the recent institutional buying activity during early July 2025, as those from Kingstone Capital Partners decided to open a position worth up to $5.6 billion in one go. This allocation would make the group the largest institutional buyer outside of other, more established institutions, and a 2% owner in Alibaba as a whole.
A vote of confidence nonetheless, and an expression that investor preference truly lies in EPS growth, rather than just P/E expansion without a strong foundation behind it.