In the third quarter, A-shares underwent a round of style rotation, with some tech growth assets that led gains in the first half experiencing adjustments, while dividend-heavy sectors such as banks and coal showed relatively greater resilience. As industry divergence eased, fourth-quarter market pricing may further shift from theme and expectation-driven to renewed verification of earnings realization, valuation levels, and industrial prosperity.
Q3: Growth assets saw significant pullbacks, leverage and trading cooled
In the first half of 2026, A-shares displayed a clear growth-style market, with AI hardware and related tech industry chains performing prominently. The Shanghai Composite Index rose 3.16% cumulatively, the Shenzhen Component Index gained 19.82%, while the ChiNext Index and the STAR Composite Index surged 35.58% and 53.99% respectively. The stronger the tech growth attributes of an index, the more prominent its stage gains, and market style divergence once reached a level rarely seen in recent years.
Entering the third quarter, this pattern changed. According to statistics from well-known subjective private fund Freshwater Springs Investment, as of June 30, the ChiNext Index's stage excess return relative to the CSI Dividend Index once reached 48.6%; by early September, this excess return had largely been given back, and the year-to-date returns of the two indices returned to relatively close levels.
Sector-level rotation was even more evident. After Freshwater Springs Investment split the 31 primary industries under the Shenwan classification by performance in the first half and since the third quarter, it found that the correlation coefficient of industry gains and losses was -0.74, indicating fairly obvious reversal characteristics: sectors that performed well in the first half adjusted somewhat since the third quarter, while sectors that had previously lagged became relatively stronger. The historical percentile of industry divergence fell back from a high of 94.7% at the end of June to a neutral range.
Changes in leveraged funds are also an important clue for observing this round of market adjustment. On June 23, the balance of margin financing and securities lending in A-shares exceeded 3 trillion yuan for the first time; from January to June, 960,600 new margin trading accounts were opened, up 56.96% year on year. Entering the third quarter, the margin balance declined from its high, and the role of leveraged funds in driving market trading weakened at the margin. Market trading activity also declined, with turnover in mid-September once shrinking to about 1.6 trillion yuan, as the market entered a digestion phase after earlier gains.
Q4: Earnings realization becomes the main verification standard
Against the backdrop of style rebalancing in the third quarter, industry divergence returning to neutral, and leveraged funds pulling back, a review of recent institutional views shows that the market's focus in the fourth quarter is changing.
At the index level, institutions' judgments on the fourth quarter generally lean toward the view that the medium-term trend remains unchanged while short-term consolidation is still needed. Over the medium term, the policy environment, asset allocation demand, and fundamental expectations still support the market, but after a rapid short-term rise, the index still needs time to digest earlier gains.
At the industry level, style rebalancing does not mean the end of the tech rally. Many institutions still regard technology as an important medium-term main line, and in the next stage market pricing may further shift from industry beta-driven to industrial prosperity, earnings realization, and valuation matching. Freshwater Springs Investment is skilled at finding expectation gaps when market expectations and fundamentals diverge. The institution recently said that the current market is in a digestion period after earlier gains, macro narratives have a more prominent impact on the market, while active pricing of individual stocks is insufficient. Some companies conveyed relatively positive information in interim earnings communications, but share price reactions remained muted. This disconnect between share price performance and industrial changes means some fundamental opportunities have not yet been fully priced in, providing room to look for expectation gaps later.
Similar changes are also reflected in recent views from other leading private funds. Greenwoods Asset Management emphasized that from a longer-cycle perspective, whether in tech tracks represented by computers and electronics or high-end manufacturing represented by machinery equipment, the underlying logic for adding positions rests on long-term industrial growth space and corporate earnings realization capability. After the market turbulence in July, earnings certainty became an important criterion for institutional stock selection. Panjing Investment believes that AI-related trading has entered the earnings verification stage, space for pure concept speculation has shrunk, and capital is expected to migrate toward directions with strong earnings certainty and clear industrial trends.
Beyond the tech sector, going global remains a structural direction followed by some institutions. Fields such as home appliances, construction machinery, and power grid equipment, where overseas revenue accounts for a relatively high share and export prosperity remains resilient, may have certain earnings support. At the same time, cyclical resource products such as nonferrous metals and coal have also attracted attention from many institutions, with some views suggesting that cyclical sector earnings may recover at the margin. Pharmaceuticals have also gradually entered the attention range of some institutions, especially innovative drugs, whose industrial trends and internationalization progress have become important observation variables. Meanwhile, the consumer sector has not yet formed a clear consensus, but some institutions believe structural opportunities still exist.
In its monthly report, Freshwater Springs listed innovative drugs and broad consumer categories as key directions that are "severely drained by the AI rally, have low crowding, but have large growth expectation gaps," consistent with its long-standing investment methodology of positioning against market sentiment and seeking expectation gaps. Chongyang Investment believes that China's innovative drug industry is ushering in a new round of revaluation. Marginal changes include the gradual deepening of the internationalization of Chinese innovative drugs, as well as the domestic market driven by top-level positioning for innovative drugs, which will see better-than-expected development.
In addition, high-dividend, stable-cash-flow assets are still regarded by some institutions as defensive allocations in portfolios. For example, the holding approach of Ningquan Asset's Yang Dong, aside from internet leaders, is mainly allocated to companies with low valuations, high dividends, and good cash flow.
On the risk side, the fourth quarter still faces multiple uncertainties. Overseas, the Federal Reserve raised rates in September, and there may still be room for further tightening in the policy path this year. This could indirectly increase valuation pressure on high-valuation sectors such as tech growth and innovative drugs through global liquidity, exchange rates, and risk appetite, while the impact on export manufacturing is more reflected in overseas demand and exchange rates. Domestically, policy intensity and fundamental recovery remain important verification factors for further market upside. In addition, changes in market funds and trading structure also deserve attention. Since the third quarter, the margin balance and trading activity have declined. If this trend continues further, it will constrain the recovery of market risk appetite and the elasticity of upward index movement; after valuation adjustments, some previously hot sectors still need to be watched for changes in fund crowding and expectation gaps.
Overall, the style rotation in the third quarter looks more like a rebalancing by the market after extreme divergence earlier. Entering the fourth quarter, the tech sector may still be an important investment main line, but market pricing may further shift from previous industry beta to industrial prosperity, earnings realization, and valuation matching. At the same time, structural opportunities in directions such as export manufacturing, pharmaceuticals, cyclicals, and dividends are also expected to receive more attention.
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