Recent A-share market declines have been driven by external risk factors and liquidity pressures, but the just-completed 2026 third-quarter earnings season reveals a different picture, with a notable divergence between fundamentals and capital flows.
According to CICC (ASX: 601995) Chief Domestic Strategist Li Qiusuo, the market has already priced in overly pessimistic expectations, and the long-term steady upward trend for A-shares remains unchanged.
Li Qiusuo noted that recent external disruptions are mostly short-term and temporary in nature.
From a valuation perspective, after the significant correction, overall A-share valuations have regained strong appeal. Major broad-based index valuations have fallen markedly, with the CSI 300 forward price-to-earnings ratio dropping to as low as 11.8x, below the historical average of the past decade. The ChiNext Index forward P/E ratio, representing technology and growth stocks, has fallen to the 2.8th percentile of the past ten years, an extreme historical level.
Beyond broad indices, structural valuation divergence has also narrowed. Data shows that the P/E TTM ratio between CSI 1000 and CSI 300 fell from a high of 3.9x earlier this year to 2.8x, indicating that previous localized overvaluation in small-cap stocks has been significantly alleviated. At the sector level, most industries now trade below their historical average valuations. Sectors including non-ferrous metals, food and beverage, real estate, power equipment, media, non-bank financials, environmental protection, and beauty care all have P/E TTM ratios below the 25th percentile since 2010.
The advantage in stock-bond relative value is another prominent feature. The CSI 300 dividend yield has risen to 3.4%, and the stock-bond relative attractiveness index reached 184%, above the 90th percentile of the past five years, placing equity assets at a historically high relative value level. Additionally, comparing domestic broad-based index valuations with major global indices such as those in the U.S., Japan, India, and Europe also reveals strong investment appeal.
Regarding the current mispricing, Li Qiusuo concluded that recent policy signals for stabilizing growth and markets will help gradually stabilize investor expectations and boost market confidence.
Valuation appeal ultimately requires fundamental support. Recent A-share third-quarter earnings data shows that for the first three quarters of 2026, total listed company revenue grew 5.7% year-on-year, and net profit grew 8.2% year-on-year, both exceeding nominal GDP growth for the same period. Non-financial corporate earnings were particularly resilient, with many prosperous industries providing strong support for overall profitability.
Li Qiusuo identified two core drivers behind non-financial corporate earnings growth: rising oil and certain chemical prices due to overseas geopolitical changes, and upward price movements in certain technology hardware and upstream resources driven by AI demand. Specifically, five sectors, electronics, non-ferrous metals, petroleum and petrochemicals, basic chemicals, and computers, contributed the vast majority of profit increments for non-financial companies in the third quarter.
More critically, the quality of listed company earnings is undergoing fundamental improvement. Li Qiusuo stated that profitability, cash flow, and balance sheets have all continued their prior improvement trends. After a four-year downturn, A-share non-financial corporate ROE may have bottomed in last year's fourth quarter and has shown a gradual recovery trend this year. Third-quarter non-financial ROE (TTM) achieved sequential improvement, supported by upstream and TMT sectors.
Cash flow improvements provide confidence for future expansion. Data shows healthier cash flow statements, with improved financing cash flow supporting corporate capital expenditure. Li Qiusuo observed that non-financial corporate capital expenditure growth continued to rise in the first three quarters, with corporate financing demand and investment confidence broadly improving. High-prosperity tracks such as the AI industrial chain and price-driven upstream industries are generally expanding capital expenditure.
Additionally, balance sheet conditions are optimizing, with improved growth in operating items indicating a recovery in corporate vitality, particularly evident in the high-prosperity TMT sector. Li Qiusuo emphasized that China has large policy space, a solid foundation, ample development potential, and competitive advantages in many industrial sectors globally. As representatives of China's outstanding enterprises, A-share listed companies continue to show a medium-term positive fundamental trend. Solid fundamental support combined with highly attractive valuations keeps him optimistic about the medium-to-long-term development prospects of the A-share market.
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