CMSC has released a research report stating that the current market has entered the third stage of an upward trend. The market's driving force is shifting from incremental liquidity to corporate earnings fundamentals, with a K-shaped global economic divergence emerging.
Domestically, economic momentum is transitioning, with high-tech and advanced manufacturing leading while traditional sectors like property and consumption remain under pressure. External demand is favorable, whereas domestic demand is relatively weak. Technology has replaced securities firms as the core driving force of the market rally, with AI computing power serving as a key market indicator.
Looking ahead to the second half of the year, indices are expected to rise moderately, propelled by the technology sector. The fourth quarter may mark an inflection point for a style rotation from growth to value. Investors should focus on three key themes: the AI industry chain, export strength, and resource and energy security.
The main views of CMSC are as follows:
Intensifying Global K-Shaped Divergence
The K-shaped divergence in global markets cannot be explained by risk appetite or ample liquidity alone. It fundamentally reflects the divergence in global economic conditions mirrored in capital markets.
Overseas, the U.S. economy currently resembles a "narrow-based resilience" supported by a few strong entities, rather than a broad-based recovery driven by a virtuous cycle of employment, income, consumption, and profits.
Domestically, overall economic growth is marginally weakening. The annual theme has shifted from "aggregate recovery" to "momentum transition." High-tech and advanced manufacturing are leading economic growth, while traditional pillars like consumption, property, and traditional cyclical sectors face sustained pressure, making it difficult to contribute to a broad-based recovery.
On the demand side, structural fragmentation persists. Export demand shows strong, high-growth certainty, whereas domestic demand remains generally weak. Fiscal policy focuses on targeted support rather than large-scale expansion. The overall economy exhibits extreme divergence characterized by "strong tech, weak tradition" and "strong external demand, weak internal demand."
Technology Remains the Overarching Theme
According to the bank's analytical framework, the market is currently in the third stage of an upward trend. Index gains can no longer be driven by loose liquidity and incremental funds but must rely on sectors with the most certain earnings and profitability.
Globally, EPS-driven trading has become a consensus in equity markets. The widespread "K-shaped" divergence makes the profitability of the technology sector relatively more advanced compared to other areas.
Furthermore, during this market upswing, technology has replaced securities firms as the new "bull market flag-bearer." The bank is optimistic that indices will rise moderately in the second half of the year, driven by the technology sector.
Market Style Outlook
The fourth quarter may mark an inflection point for a style rotation from growth to value. Historical review shows that since 2010, a growth-to-value style rotation has occurred roughly every 2-3 years, with liquidity and trends in emerging industries being core drivers.
The current growth cycle has lasted nearly two years, with growth stocks significantly outperforming value. Institutional crowding into TMT sectors is high. The fourth quarter could be the turning point for this style rotation.
Potential drivers include: 1) The market pricing in Fed rate cuts ahead of time, with cuts potentially materializing in early 2027; 2) Changes in the earnings growth rate and expectations for the AI and technology sector.
Liquidity and Capital Flow Outlook
In the second half of the year, margin financing and private fund flows are expected to continue providing significant incremental capital. The supply side of funds is likely to continue improving.
The growth rate of private fund assets under management may continue to recover, contributing important incremental funds. Net inflows from margin financing are expected to expand further, becoming a key market increment.
Additionally, public fund issuance is expected to continue its recovery trend, though explosive growth like in previous bull markets may be unlikely. Active equity-focused public funds are expected to see continued slight net redemptions.
Regarding insurance funds, premium income is expected to continue improving. The utilization balance of insurance funds is forecast to maintain moderate growth while contributing some incremental capital.
On the demand side for capital, overall demand is expected to continue recovering after market improvement. IPOs, refinancing, and shareholder减持 may expand compared to the first half of 2026.
Based on comprehensive supply-demand calculations, A-shares may see a net inflow of approximately 510 billion yuan in the second half of 2026.
Industry Trends and Allocation Recommendations
Focus on three key themes: the AI industry chain, export strength, and resource and energy security. Considering the macroeconomic environment, mid-cycle industry momentum and earnings, and industrial trends, the following three themes are recommended for the second half of the year:
First: Focus on separating the genuine from the speculative within the AI technology chain. This includes areas like electronic cloth, high-frequency high-speed resin, HVLP electronic copper foil, ABF film, indium phosphide, ceramic powder, optical modules, PCB/copper-clad laminate, storage, fiber optic cables, and semiconductor equipment and materials.
Second: The overseas expansion theme, especially in segments benefiting from increased overseas restocking demand, rising overseas revenue share for listed companies, or high/improving overseas product penetration. Examples include batteries, wind power equipment, power grid equipment, construction machinery, general equipment, automation equipment, and agrochemical products.
Third: The resource security and energy system restructuring field, such as non-ferrous metals (industrial metals, minor metals, energy metals) and power equipment (batteries, energy storage, wind power equipment).
Based on the above, key recommended sectors to watch include electronics (semiconductors, components, electronic chemicals), power equipment (batteries, wind power equipment, grid equipment), machinery (automation equipment, specialized equipment), non-ferrous metals (energy metals, minor metals, industrial metals), and non-bank finance (securities).
Industrial Investment Opportunities
In the first half of 2026, A-shares already showed significant structural divergence. Major indices performed relatively moderately, while the technology industry chain significantly outperformed. Market trading primarily focused on global AI capital expenditure, domestic semiconductor substitution, upstream raw material price increases in supply chains, and sectors with earnings support.
Looking ahead to the second half, sector divergence is expected to intensify further. AI will likely remain the largest theme. Global market trading around AI has entered a stage focused on examining profitability. Divergence within the technology sector will emerge, with speculative concept炒作 being abandoned.
Capital is expected to rotate towards directions with certain earnings and sustainable industrial trends, as well as areas with potential for achieving an industrial "zero to one" breakthrough. Based on this, the bank believes the main investment opportunities in the second half will concentrate on overseas computing power, domestic computing power, rising resource prices, and commercial aerospace.
A-Share Earnings Outlook
In the first quarter, driven by technological innovation and rising resource prices, A-share earnings improved beyond expectations. For the second half, the long-cycle demand pull from the AI industry is expected to persist, supply constraints following manufacturing capacity rationalization will gradually appear, and a recovery in corporate expansion意愿 will drive a capital expenditure cycle.
These three factors are expected to jointly drive A-share earnings into a steady upward trajectory. From an earnings cycle perspective, revenue and profit are currently in a recovery channel driven by technology and resources, though ROE recovery is relatively slow, indicating profit quality has not yet entered a strong expansion cycle.
Simultaneously, with capacity rationalization over the past two years, the inventory cycle has entered an active restocking stage, and capital expenditure is shifting from contraction to expansion. Historically, A-share earnings upcycles typically last 12-18 months. This upcycle is expected to continue into the first half of 2027.
The bank forecasts full-year cumulative earnings growth for all A-shares at 9.2%. For A-share non-financials, under a neutral scenario, cumulative profit growth for Q2, Q3, and Q4 is projected at 13.5%, 13.3%, and 15.6%, respectively.
Among major sectors, higher expected earnings growth is concentrated in information technology, midstream manufacturing, and resources.
Policy Outlook
Overseas, attention should be paid to the impact of the U.S. midterm elections on the global situation in the second half. As the critical window before the elections approaches, policy and market interactions may significantly intensify.
On one hand, if economic data remains strong and inflation falls slower than expected, markets may renew concerns about the Fed maintaining a tight stance or even delaying easing. Long-term U.S. Treasury yields and the dollar could rise intermittently, putting valuation pressure on high-growth sectors.
On the other hand, if the stock market corrects or signs of weakness appear in employment or consumption, the White House tends to increase statements and pressure on monetary policy, trade, fiscal, or regulatory policies to maintain a "strong economic performance" narrative for the elections.
Domestically, under the framework of "balancing development and security," it is recommended to view security-related issues as a key theme for observing potential policy support. Focus areas include resource security (including energy security) and industrial chain self-sufficiency and controllability.
Risk Warnings
Economic data falling short of expectations; Fed policy easing进度 slower than expected; industrial support measures falling short of expectations.
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