Observing the A-share market solely through the lens of corporate earnings and index movements can sometimes lead to confusion. Profits may not have improved, yet the market rallies first; macroeconomic data might be decent, but stock prices do not necessarily respond accordingly.
The fundamental question is: what kind of future is the market currently willing to price in?
On June 1st, China Merchants Securities Co.,Ltd. released a strategic thematic report on the A-share market, attempting to explain its long-term operational patterns through four dimensions: thematic trends, capital flows, market dynamics, and cycles. The core thesis presented by analyst Zhang Xia in this report is: "Repricing of market cognition is the key to understanding all phenomena in the A-share market: the market is not trading the economy itself, but rather the market's perception of the economy."
This statement is broad but captures a persistent characteristic of the A-share market. Bull-bear transitions are not necessarily a mechanical, linear reflection of GDP, profits, or interest rates. More often, they represent the market reassessing whether old growth narratives can continue and whether new growth narratives can gain credibility and attract capital. When an old narrative concludes and a new one has not yet solidified, the market tends to enter a corrective phase. A bull market foundation emerges only when a new narrative is embraced by capital and the thematic trend begins to diffuse.
The report applies this framework to the period beyond 2026, highlighting a convergence of events: the start of a new five-year plan, a U.S. midterm election year, and a transition in the A-share market from valuation-driven to earnings-driven dynamics. Under its scenario assumptions, corporate profit growth is expected to turn positive in 2025 and then sustain a moderate 5%-10% increase. The recovery of domestic demand and technological self-reliance are identified as the two most critical trends to monitor.
The Market's Focus: Shifting Growth Engines, Not Just GDP
Since its inception, the A-share market has served not merely as a mirror of corporate profits but as a barometer for economic transformation.
The capital market's role in serving the real economy implies a long-term abundance on the supply side: new listings continuously enter the market, diluting the existing capital pool. The high proportion of individual investor accounts alongside the high market capitalization share held by institutions creates an inherently dynamic and competitive market environment.
This explains a common paradox: a decent economy does not guarantee a rising stock market, and economic pressures can sometimes coincide with a bull market.
Periods like 2006-2007 (urbanization and resources), 2015 (Internet+), and 2020 (new energy) were phases where new narratives were collectively priced in by the market. Bear markets often occur during the gap when an old thematic trend recedes before a new one takes hold.
In other words, the A-share market frequently trades not on "how good things are now," but on "who will represent the next wave of growth."
Identifying Thematic Trends: Look to Penetration Rates, Not Forced Narratives
Thematic trends represent the most fundamental directional variable in the A-share market.
The framework states directly: "Thematic trends cannot be manufactured; they can only be identified."
A thematic trend is not the short-term boom of a sector or the profit growth of a single stock. It is the industrial trend formed during the economy's transition from old growth drivers to new ones. Urbanization, mobile internet, new energy, and artificial intelligence are expressions of thematic trends across different eras. Whether they truly become market themes depends on their stage of market penetration.
Thematic trends have three layers: the micro layer is the industrial trend, the meso layer is structural transformation, and the macro layer is the theme of the era. An industrial trend can become a market theme only when it aligns with the era's theme and the direction of structural transformation, and when its penetration rate surpasses a critical threshold.
The most crucial quantitative tool is the penetration rate S-curve:
0%-5%: Introduction phase, primarily thematic investing.
5%-35%: Acceleration phase, where the industrial trend transitions from story to reality.
35%-80%: Maturity phase, growth slows, and valuation logic shifts.
Above 80%: Saturation phase, with significantly narrowed growth space.
The 5% threshold is vital. Surpassing it typically indicates that the technology path, business model, supply chain, and demand are beginning to validate each other. The 5%-35% range is often the most favorable period, where profits frequently exceed expectations and valuations can rise simultaneously.
However, no thematic trend lasts forever. It ends naturally when penetration peaks; it ends prematurely if the technology path, policy environment, or business model is disproven; and it can be extinguished by a liquidity drought.
Capital Flows: Setting the Pace and Style of Bull and Bear Markets
Capital determines the speed and style of A-share bull and bear markets, but "capital" should not be viewed as a single aggregate figure.
Here, capital is not a vague concept. The analysis divides it into three layers: macro liquidity, market liquidity, and structural liquidity.
Macro liquidity concerns the size of the overall pool, such as monetary policy, credit cycles, and money supply. Market liquidity examines whether funds flow into the stock market, considering factors like mutual fund issuance, northbound capital, margin trading balances, and insurance fund allocations. Structural liquidity looks at internal rotations within the stock market, such as shifts from consumption to technology, from large-cap to small-cap, or from value to growth.
In the old paradigm, the credit cycle was central. From 2005 to 2017, credit expansion often corresponded with bull markets, and credit contraction with bear markets.
Post-2018, this relationship has significantly weakened due to three reasons: the economy shifted from incremental expansion to stock optimization; corporate financing moved from indirect to direct channels; and the real estate sector's role as a capital reservoir diminished, with household asset allocation gradually shifting towards financial assets.
Therefore, in the new paradigm, the sources of capital influencing the A-share market have become more complex: industrial trends, global liquidity, shifts in household asset allocation, and the credit cycle all play a role.
More importantly, the nature of incremental capital determines market style.
Northbound capital and industrial capital tend to be more contrarian and value-oriented. Mutual funds and insurance capital lean more towards trend-following and growth. Individual investors and leveraged funds are more prone to chasing themes and momentum. Policy-driven capital often acts counter-cyclically to provide support. Shifts in market style are frequently not about a change in "aesthetic preference" but a change in the dominant source of incremental capital.
Market Dynamics: The Source of High Volatility Extends Beyond Sentiment
The source of high volatility in the A-share market is not merely investor sentiment but the combined result of institutional design, capital structure, and competitive dynamics.
First, the capital market serves the real economy. Historically, the market's financing function was stronger, with new listings, secondary offerings, and share reductions impacting the capital balance. The framework specifically notes that as the market rises, a point may be reached where capital demands from IPOs, secondary offerings, and shareholder减持 exceed the inflow of incremental capital, potentially triggering a fundamental reversal in market trend.
Second, the coexistence of individual and institutional investors. While 90% of trading accounts belong to individuals, institutions hold about 60% of the market capitalization. Pricing power lies more with institutions, while emotional volatility often stems from individuals, together shaping the A-share trading ecosystem.
Third, policy. Policy can influence liquidity, define thematic trends, and alter the rules of market dynamics.
Following the release of the new "National Nine Articles" in 2024, one notable change is the shift in the capital market's top-level design from a stronger emphasis on financing towards a more balanced focus on both investment and financing. The analysis notes that from 2024 to 2025, the scale of A-share dividends and buybacks is projected at 5.24 trillion yuan, significantly exceeding equity financing for the first time. By the end of 2025, various long-term funds are expected to hold approximately 23 trillion yuan in A-share circulating market cap.
This indicates a gradual evolution in the A-share market's institutional foundation, moving from a "financing market" towards a "return market." However, a complete overnight transformation is not expected. Old competitive dynamics persist, and new rules will gradually permeate the system.
Cycles: The Temporal Framework Where Timing is Everything
Cycles are not another independent indicator. They function more as a temporal coordinate: the same thematic trend, with the same capital, can yield completely different outcomes at different stages.
An industrial trend in its early stages presents contrarian opportunities. During its momentum phase, it may become a major uptrend. In its transition phase, the market begins to differentiate. During its decline phase, even good companies might be sold off indiscriminately.
The framework divides a typical five-year A-share cycle into four stages:
Initiation Phase: Policy and credit bottom, new thematic trends germinate, suitable for contrarian positioning.
Momentum Phase: Thematic trend becomes clear, capital flows create positive feedback, trend-following strategies are most effective.
Transition Phase: Earnings are still being released, but marginal liquidity tightens, and market differentiation intensifies.
Decline Phase: The old thematic trend unravels, capital dries up, and the core task shifts to defense and researching the next cycle's theme.
An additional observation is that policy inflection points often occur in years ending with '9' or '4', such as 2004, 2009, 2014, 2019, and 2024. This corresponds to the nested resonance of policy cycles, credit cycles, economic cycles, and market cycles. This is not a fortune-telling formula but can serve as a clue for observing cyclical positioning.
The practical implication of cycles is straightforward: the season dictates the strategy. The initiation phase emphasizes positioning; the momentum phase emphasizes holding; the transition phase emphasizes realization; the decline phase emphasizes research.
The Post-2026 Challenge: Can Earnings Sustain the Rally?
Looking ahead to 2026 and beyond, the framework outlines a backdrop of "three-phase convergence."
First, the commencement of the 15th Five-Year Plan. A new five-year planning cycle begins, with fiscal policy remaining proactive. The core driver shifts from the previous credit cycle to a policy cycle centered on broad fiscal expenditure.
Second, a U.S. midterm election year. Historically, U.S. midterm election years are more prone to policy expansion, which could resonate with China's 15th Five-Year Plan开局, jointly boosting global industrial demand and the Producer Price Index (PPI).
Third, a phase transition within the A-share market itself. The market is transitioning from the second, liquidity-driven phase of an uptrend to the third phase driven by earnings improvement. A key anchor for observation is the bottoming and recovery of PPI, which is directly related to whether corporate profits genuinely improve.
Regarding sector direction, technological innovation remains a long-term strategic focus. AI, computing power, and robotics are discussed within the context of the acceleration phase of penetration. Within the cyclical sectors, non-ferrous metals and chemicals are highlighted for their potential earnings elasticity driven by PPI recovery. Domestic consumption offers opportunities for structural repair.
However, this outlook is not unconditional optimism. The assumed path requires earnings to take the baton, PPI to recover, and supportive liquidity and policy environments. The report lists two primary risk categories: economic data falling short of expectations and overseas policy tightening exceeding expectations.
Finally, one more change cannot be ignored: AI is not just a market theme; it may also transform investment methodology. The framework concludes by noting that future AI investment tools might provide portfolio suggestions based on an understanding of world and stock market dynamics. However, investment outcomes will still require human responsibility, an area where AI cannot replace investors in the short term.
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