The recent surge in Chinese stocks hit the pause button on Tuesday after Beijing failed to roll out another large stimulus package, a surprise to investors hoping to add more fuel to the unprecedented rally.

Hong Kong’s benchmark Hang Seng Index (^HSI), which is loaded with large Chinese stocks, dropped around 9% on Tuesday, its worst day since October 2008, after climbing around 20% over the past month on the heels of China unleashing its most aggressive monetary stimulus since the pandemic.

China’s benchmark CSI 300 (000300.SS) also experienced a volatile day as expectations of a large stimulus announcement fueled an initial 10% rise after markets reopened from the country’s weeklong holiday. The index later gave up those gains, finishing the day up a more modest 6%.

The stimulus, an effort by China to course-correct its struggling economy, was first announced on Sept. 24. Since then, a surge of inflows has dramatically boosted Chinese equities, particularly in real estate and consumer staples, as investors bet on Beijing’s comeback.

But Wall Street remains split on whether or not now is the right time to buy into the market.

“The short-run pop [signals that] people are feeling better,” Jeremy Schwartz, chief investment officer at WisdomTree, told Yahoo Finance’s Market Domination. “Will it be enough to move their economy? That’s very much an open question [because] the sentiment was so, so negative.”

The stimulus, which includes interest rate cuts, lower reserve requirements for banks, liquidity for the stock market, and mortgage relief, among other measures, comes as the nation’s second-largest economy attempts to pull itself out of a long slump spurred by deflationary pressures from a sluggish property market and weak domestic demand.

At a press conference on Tuesday hosted by China’s top economic planner, the National Development and Reform Commission (NDRC), Beijing said it’s committed to enacting further support in order to reach its economic goals, which include an annual growth target of “around 5%.”

“We are fully confident in achieving the annual economic and social development targets,” Zheng Shanjie, chairman of the NDRC, told reporters. However, he did acknowledge that the Chinese economy is facing a “more complex and extreme” global environment.

At the press conference, the NDRC announced it would issue 200 billion yuan ($28 billion) to local governments for spending and investment projects by year’s end. But economists have been waiting for a fiscal package worth around 2 trillion yuan ($284 billion) to be announced.

On Tuesday, other Chinese-listed exchanges and companies were also on the move. The Shanghai Composite (000888.SS), a key indicator of the overall performance of the Chinese stock market, eked out gains of around 5% after initially opening the day higher. The index has rallied by double digits, jumping more than 20% from its September lows. It’s up about 30% over the past month.

Similarly, shares of Chinese e-commerce giants like Alibaba (BABA) and PDD Holdings (PDD) have surged over that same period, up more than 35% and 55%, respectively, despite single-digit losses on Tuesday.

WisdomTree’s Schwartz said investing in the region depends on whether or not traders can afford to be “nimble” and “move in and out” of the market depending on the level of risk.

“For strategic, long-term investors, it’s tricky,” he said, noting that a “very dicey” geopolitical environment, coupled with the upcoming US election, further complicates the investment thesis.

“The ultimate question is: Are you going to be rewarded to be in China as a communist country and all of the other problems with the geopolitics, versus the democratic countries like Japan and India that are more US allies versus US adversaries at the moment?” he said.

Others say it’s only the start of China’s recovery and now could be the time to reassess.

“We’re really in the very, very early innings,” Brendan Ahern, CIO at KraneShares, told Yahoo Finance’s Morning Brief. “And then you have the high probability of better news coming. Instead of looking through the rearview mirror, let’s look through the windshield.”

Goldman Sachs added to bullish commentary in a note on Monday titled “China strategy: if not now, when?” The team, led by analyst Kinger Lau, upgraded China stocks to Overweight from Marketweight and argued for potential upside between 15% and 20% for both the MSCI China Index (2801.HK) and CSI 300 Index.

Other big banks, including HSBC Holdings and BlackRock, also upgraded mainland Chinese stocks in recent days, building on expectations that the rally still has more room to run.

“Many China watchers may have suffered ‘policy fatigue’ over the past 1 to 2 years, with the policy delivery in the post Covid-era generally being perceived as underwhelming,” Goldman Sachs wrote in its report. “Given low market expectations, the latest easing package has positively surprised investors and altered the policy narrative along a few dimensions.”

The analyst team added, “More stimulus is probably needed to turn things around, but the profit outlook [for Chinese companies] has moderately improved,” with valuations still below historic averages amid depressed stock prices.

“Even if the rally falters, [Chinese equities] still have a place in investor portfolios,” the report read.

As investors look ahead to the next possible catalyst for Chinese stocks, analysts say positive momentum will likely hinge on the magnitude and execution of more fiscal policy, rather than just monetary support.

“A well-targeted fiscal stimulus, aimed at rejuvenating the property sector and reviving animal spirits, could significantly improve China’s economic prospects, potentially generating positive spillovers for the global economy,” Seema Shah, chief global strategist at Principal Asset Management, wrote in a note on Monday.

“While investors have reason for cautious optimism, much will depend on the size and implementation of the various measures, details of which are still pending.”

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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