The global capital markets experienced a broad bull run amidst macroeconomic uncertainties in 2025, prompting institutions to unveil their 2026 investment outlooks as the year concluded. The primary point of contention revolves around whether the AI-driven rally, spearheaded by U.S. tech stocks, has become overheated. Conversely, a consensus of "cautious optimism" has been assigned to the Chinese market. A-shares not only demonstrated resilience with impressive gains in 2025 but are also poised for a new cycle of valuation recovery and structural opportunities, supported by multiple tailwinds including improving corporate earnings, capital reallocation, technological self-reliance, and "anti-involution" policies.
The debate over whether AI stocks are overheated remains a hot topic. AI-related equities have dominated the trajectory of the U.S. stock market for nearly two years, propelling it to successive record highs amidst the global tech wave. However, discussions about the potential overvaluation of U.S. tech stocks persist as a major concern for investors. Year-end forecasts from institutions reveal significant divergence on this issue. Some argue that U.S. tech valuations have become excessive, advising investors to rebalance their portfolios. Others contend that, compared to historical levels, the current concentration in leading tech giants is far from reaching a peak.
UBS exhibits greater optimism towards U.S. tech stocks, projecting further global tech stock gains in 2026. The firm argues that while the growth of the "Magnificent Seven" (Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta) has surpassed all other U.S. tech companies when measured by tech investment, such investment at 1.9% of GDP remains well below the 1995-2000 level—when ICT-related capital expenditure approached 3% of U.S. GDP. Furthermore, despite a significant surge in capex from the 11 largest U.S. tech companies (projected to jump 38% overall in 2025), they likely can still fund this with internal cash rather than borrowing. Simultaneously, the current profitability of tech giants is substantially higher than that of their counterparts during the early 2000s dot-com bubble. Valuation-wise, a P/E ratio of 34 is significantly lower than the multiples seen during the dot-com bubble and the "Nifty Fifty" era—when the top 30% of stocks traded at P/Es as high as 45 and 60 times, respectively.
Invesco, however, believes U.S. tech stock valuations are stretched and recommends rebalancing exposure to the sector. The firm highlights increasing risks as market concentration reaches multi-decade highs. According to Invesco's data, returns from just a handful of AI companies accounted for over half of the S&P 500's returns in 2025 and nearly one-third of total global equity returns (as of the end of October). Meanwhile, although data center expansion has been primarily funded by cash reserves and operating cash flow so far, concerning signals emerged in 2025, such as the use of debt, complex equity investments, and vendor financing deals. The current pace of capital expenditure is approximately six times recurring revenue, suggesting that substantial revenue growth is needed to justify this spending level. "At this stage, the AI investment theme can persist, but returns should be driven more by earnings growth than by expanding valuations," Invesco stated, recommending exposure to other, more attractively valued AI opportunities, particularly Chinese tech stocks. Li Changfeng, Market Strategist at AllianceBernstein, also noted, "AI is undoubtedly a long-term structural opportunity, but short-term market performance shows signs of overheating." This is primarily due to investor fervor for the AI theme fueling speculation in lower-quality, unprofitable tech stocks, coupled with surging capital expenditures from major hyperscalers, which is shifting these formerly asset-light, software-focused businesses towards heavier models, potentially pressuring future free cash flow and significantly increasing depreciation and amortization costs. The firm advises investors to shift focus towards "growth supported by actual performance." Nevertheless, institutions are unified in their positive view on China's AI-related sectors. UBS suggests that strong earnings and stock performance from U.S. tech firms could buoy related A-share sectors and stocks. Invesco similarly points to Chinese tech stocks as an alternative if U.S. tech becomes overheated.
The long-term value of A-shares is beginning to emerge. Despite challenges like volatile trade conditions, A-shares delivered robust returns in 2025, supported by policy buffers and expectations for capital market efficiency reforms. As of December 29, 2025, the Shanghai Composite Index had risen 18.3% year-to-date, the Shenzhen Composite Index gained 19.4%, and the ChiNext Index surged 40.7%. "The A-share market has decoupled from macro data, exhibiting a recovery trend of its own," Li Changfeng remarked. Concurrently, Morgan Stanley statistics show the MSCI China Index and the Hang Seng Index both rose over 30% in 2025, making China one of the year's best-performing major equity markets and reflecting a trend of structural improvement. Institutions remain optimistic about Chinese capital markets for 2026. Wang Yan, Morgan Stanley's Chief China Equity Strategist, stated, "For Chinese equities, following the high returns of 2025, 2026 will be a year of stabilization." This implies limited upside for major indices, moderate earnings growth, and valuations stabilizing at a higher range, with onshore and offshore markets expected to perform similarly. Li Changfeng summarized his outlook for A-shares over the next year as "cautiously optimistic." Kinger Lau, Goldman Sachs' Chief China Equity Strategist, holds a similar view for 2026, stating, "We expect the bull market to continue, but at a slower pace." The firm forecasts a 38% rise for Chinese equities by the end of 2027, driven by 14% and 12% earnings growth in 2026 and 2027, respectively, plus approximately 10% potential valuation re-rating. The rationale for institutional optimism towards A-shares is relatively consistent: fundamental improvement forms the base, domestic corporate governance reform is a long-term driver, and potential substantial capital inflows are a direct catalyst for market gains. Leon Qi, UBS China Equity Strategist, expects overall A-share earnings growth to accelerate from 6% in 2025 to 8% in 2026, citing potentially faster nominal GDP growth and narrowing PPI contraction boosting revenue growth, alongside supportive policies and ongoing "anti-involution" efforts aiding margin recovery. "Considering the series of reforms underway for Chinese A-shares, their long-term investment value may be emerging," Li Changfeng said. He believes that unlike previous short-term stimuli, the current policy focus is more on institutional development within capital markets. This valuation recovery, driven by improved corporate governance, is more sustainable than one fueled purely by liquidity. According to UBS data, cumulative cash dividends for all A-share companies reached 1.88 trillion yuan by November 21, 2025, with the full-year total expected to exceed 2 trillion yuan for the first time. Concurrently, A-share companies have significantly increased share buybacks in recent years, with state-owned enterprises showing notable growth in repurchase scale. The most direct catalyst for valuation stimulation is capital inflow, encompassing both domestic and foreign sources. From a domestic capital perspective, individual investors, long-term funds, and institutional capital all possess significant inflow potential. Goldman Sachs infers that within Chinese household asset allocations, real estate and cash currently account for 54% and 28% respectively, while stocks represent only 11%. Similarly, institutional investors are under-allocated to equities, holding just 14% of A-share market capitalization, compared to 59%/50% in major developed/emerging markets. "We believe the structural shift of Chinese assets into equities may have already begun," Lau stated. Qi emphasized that the reallocation of household savings into stock investments will be a key driver for A-share valuation re-rating. With the property market adjustment and declining average term deposit rates, Chinese households need a new wealth reservoir. "The reallocation of household savings may have only just started." UBS estimates new A-share investor accounts numbered 1.5 million, 1.66 million, and 1.31 million in August, September, and October 2025, respectively, far below the 3.88 million recorded in October 2024. UBS believes that against a backdrop of sustained fundamental improvement in A-shares, Chinese households may further reallocate investments from bonds and money market funds to equity assets in 2026. Li Changfeng also observed that capital is already flowing from the bond market to the stock market, with demand for dividend-yielding assets from insurance and wealth management funds continuously increasing—a trend likely to continue in 2026. Beyond household savings reallocation, long-term capital continues flowing into the A-share market. Over the past year, regulators have repeatedly expressed determination to attract long-term capital. UBS calculates that Central Huijin may have purchased over 210 billion yuan in A-share ETFs by December 2025. By the end of Q3 2025, insurance companies' investments in stocks and funds exceeded 5.5 trillion yuan, an increase of 1.5 trillion yuan from end-2024. So far in 2025, 14 insurance companies have reported 36 instances of crossing the 5% disclosure threshold in 25 listed companies. From a foreign capital perspective, the Federal Reserve's interest rate cutting cycle and a weaker U.S. dollar are favorable for non-dollar assets. Xiong Yi, Chief China Economist at Deutsche Bank, forecasts the RMB will appreciate to 6.7 against the USD by end-2026, strengthening further to 6.5 by end-2027. Goldman Sachs data indicates global hedge funds have increased their China exposure, with their net exposure to the Chinese market rising from 6.8% at the start of the year to 7.8% by the end of November. Wang Yan stated that based on discussions with global investors, it is "only a matter of time" before active funds increase their allocations to China. Despite recent valuation recovery, Chinese equities still trade at a significant "discount" compared to other major global markets, offering attractive value.
Structural opportunities in Chinese equities are becoming apparent. Beyond index gains, structural changes are continuously unfolding. AllianceBernstein observes that the characteristics of Chinese listed companies are gradually transforming, with structural growth opportunities relatively insulated from the macroeconomy beginning to emerge. A prime example is the rising AI capital expenditure by Chinese tech firms, and the launch of models like DeepSeek demonstrating ample innovation momentum at the application layer. According to Goldman Sachs, DeepSeek's release triggered a strong rebound in Chinese tech stocks in 2025, led by the data & cloud, semiconductors, and AI infrastructure & power sectors. Stocks in these areas rose an average of 40%, adding over $2 trillion in market capitalization. The firm also believes the tech competition between the U.S. and China could create structural winners across the value chain. Indeed, technological self-reliance has been the strongest theme in Chinese capital markets throughout 2025. Significantly enhancing this capability is a primary goal for economic and social development during the "15th Five-Year Plan" period (2026-2030). UBS data shows the large tech sector's share of total A-share market capitalization rose from 9.9% at the start of 2015 to 23.0% by the end of October 2025. Furthermore, its share of total A-share trading volume has structurally increased since 2023, reaching 38% by the end of September 2025. Additionally, according to MIR data, the market share of domestically produced industrial robots in China's industrial sector increased from 22% in 2017 to 47% by the end of 2024, with growth accelerating noticeably over the past two years. UBS Securities machinery analysts believe leading Chinese companies in the industrial automation robotics field could further gain market share from overseas peers over the next five years. Secondly, China's export structure has undergone a qualitative transformation. Goldman Sachs argues that the resilience of Chinese exports in 2025 strongly demonstrates an evolution in their role—from providing low-cost, low-value-added goods for developed market consumers to increasingly selling to emerging markets as final destinations, gaining global market share in high-end manufacturing, and beginning to export services, intellectual property, and culture. Goldman Sachs statistics show the overseas revenue contribution of Chinese listed companies has grown from 12% a decade ago to 16% currently, and is projected to reach 20% by 2030 (compared to an average of 53%/48% for developed/emerging markets). Given higher profitability in overseas markets, this could boost MSCI China Index earnings by about 1.5% annually. While protectionist measures from trade partners are a real risk, they are unlikely to reverse the overseas expansion trend. Goldman Sachs established a "China Globalizers" portfolio comprising 25 companies rated Buy, which derive an average of 34% of revenue overseas. From the start of 2025 to early December, this portfolio rose 35%, outperforming the MSCI China Index by 9%. "Anti-involution" is another major category favored by institutions for Chinese assets. First mentioned at the July 2024 Politburo meeting, the emphasis on "anti-involution" intensified following the July 2025 Central Financial and Economic Affairs Commission meeting. This policy is seen as another supply-side reform, helping to improve supply-demand dynamics, push prices higher, enhance corporate profitability, and stimulate innovation. Goldman Sachs estimates that, from a top-down perspective, a 1% increase in PPI could drive a 2% profit increase. The firm's "anti-involution beneficiary stocks" have risen 12% since July 1, 2025, slightly outperforming the MSCI China Index by 2%. UBS recommends selectively allocating to the solar, lithium, and chemical sectors during the ongoing "anti-involution" process. Institutions have also proposed stock pools aligned with the "15th Five-Year Plan" guidelines. The plan's recommendations, released in late October 2025, set technology, security, and people's livelihoods as top priorities for China's 2026-2030 development strategy. Goldman Sachs research shows that over the past 25 years, investors adjusting portfolios based on overarching policy trends could have achieved a 13% annualized excess return, compared to the MSCI China Index's 6% CAGR. Following this logic, Goldman Sachs constructed a "15th Five-Year Plan" stock pool, screening 50 mid-cap stocks (30 A-shares and 20 overseas-listed Chinese stocks) from 21 sub-sectors to create an investment portfolio. According to the firm's data, these stocks delivered an aggregate return of 68% over the past year (compared to a 27% return for the MSCI China Index over the same period).
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