The bull market that began in September 2024 has entered its third stage, where a new narrative typically emerges after a corrective phase. This new narrative is expected to center on technology diffusion and domestic demand recovery.
The first new narrative focuses on a shift in the technology sector from upstream to downstream, and from an export-driven logic to import substitution. Key areas to watch include domestic alternatives for computing power, AI applications, and extended tech fields like innovative drugs and brokerages. The second narrative highlights the potential for a rebound in domestic demand sectors, driven by policy stimulus and low stock valuations, as the marginal contribution of exports is expected to weaken. This includes sectors such as baijiu and real estate.
Reviewing the bull market's three phases
A shares have followed a pattern of fluctuation in the first quarter, a K-shaped divergence in the second quarter, and a sharp correction in July. After these ups and downs, it is necessary to reassess the market's current phase and future narrative. The three phases of an A-share bull market are driven by different forces and feature different sector themes. The first phase is characterized by "investing in undervalued assets," the second by "investing in strength," and the third by "investing in a smooth narrative." Using the 2019-21 bull market as an example, the first phase was a gestation period driven by valuation recovery from policy easing, where low-priced assets generally benefited. The second phase was an explosion period driven by earnings improvement, leading to a "Davis Double Play" for the strongest sectors. The third phase is a peak charge where capital inflows boost market sentiment, and sectors with a clear and imaginative logic are favored.
The current bull market enters its third stage
For this cycle, the bull market began with a policy shift in September 2024. The period from September 2024 to April 2025 was the first phase, where undervalued financial, real estate, consumer, and pharmaceutical sectors recovered, followed by tech growth stocks. From April 2025, as net profit growth turned positive, the bull market entered its second phase, with the most fundamentally strong tech sector leading gains. The recent July correction has shaken the bullish conviction of some investors. However, the current policy environment remains accommodative, macro and micro fundamentals are gradually recovering, and the trend of household funds entering the market is accelerating, signaling that the A-share bull market is gradually moving into its third phase. The third phase requires attention to "investing in a smooth narrative," and based on the current policy backdrop and industrial logic, two major new narratives for the second half of the year are worth focusing on: tech diffusion and domestic demand recovery.
Narrative 1: Tech shifts from upstream to downstream, from export logic to import substitution
The AI cycle is expected to transition from hardware to applications. In the 12-15 mobile internet wave, the early hardware phase was driven by high景气, followed by a shift to application-driven growth. In the current AI wave, demand for computing power has surged, pushing up hardware costs and raising concerns about the sustainability of high capital expenditure. Similar to the 12-15 period, if large model costs decline and new AI application scenarios accelerate, the AI cycle is expected to shift from hardware to applications. Furthermore, increasing trade friction in the tech sector between China and the US will drive the AI theme to spread from computing hardware to applications and import substitution. The technology narrative is likely to shift from exports to domestic substitution and applications. The AI computing index has significantly outperformed AI applications and the Hang Seng Tech Index in recent years. From a PEG perspective, the valuation and earnings性价比 of areas like robotics and application software are becoming attractive. Key sub-sectors to watch include: Computing power import substitution - driven by policies supporting self-sufficiency, uncertainty in the trade environment may shift the tech narrative towards domestic demand. AI applications - driven by the evolution of multimodal large models, with rapid penetration in finance, media, and consumption, and the move of embodied intelligence products from B2B to B2C. Innovative drugs and brokerages - as extensions of the tech sector, innovative drugs benefit from strong fundamentals in overseas licensing, while brokerages benefit from rising trading volumes and a recovery in tech IPOs.
Narrative 2: Domestic demand rebounds with policy stimulus and low stock valuations
The domestic economy showed a K-shaped divergence in the first half of the year, with exports being the main driver of GDP growth while domestic demand remained weak. In the second half, the marginal contribution of exports is expected to decline due to a high base and trade risks. The 26Q2 real GDP growth of 4.3% is the lowest in four years and below the annual target, necessitating a policy push for domestic demand. The July Politburo meeting called for "more proactive fiscal policies and moderately loose monetary policies" to "increase counter-cyclical adjustment and expand domestic demand." This sets the stage for the domestic demand narrative in the stock market. Sectors like food & beverage, real estate, and services have lagged in this bull market, showing a combination of low stock prices and low institutional positioning. Historically, sectors with this "double low" characteristic tend to see significant future absolute or relative returns, especially when policy support is expected. Baijiu - with improving supply-demand dynamics from destocking and seasonal demand, and price stabilization from recent price hikes by Moutai, the underva
lued sector offers配置价值. Real estate - with tier-1 city housing prices stabilizing and rental rates showing signs of stabilization, a confirmed stabilization in housing prices could lead to a recovery in market confidence and valuation repair for the sector.
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