Industrial Securities Co.,Ltd. has previously emphasized that "this capital market reversal carries significant responsibilities, as the capital market will become the core platform guiding resource allocation during future economic transformation." The firm proposed three new logics to boost the stock market: supporting new quality productivity development, serving as a channel for household wealth allocation, and revitalizing high-quality assets. These three logics have continued to strengthen this year, with the virtuous cycle between capital markets and the real economy solidifying the foundation of this bull market.
Simultaneously, breakthroughs across various sectors represented by DeepSeek, semiconductors, robotics, 6th-generation aircraft, and innovative drugs have triggered industrial value reassessment. Strategic confidence amid great power competition and clearer transformation directions outlined in the 15th Five-Year Plan have shifted long-term market narratives and perceptions, further reinforcing this bull market's logic and raising its ceiling. After the Shanghai Composite Index briefly surpassed 4000 points in 2025, how will the market perform in 2026?
I. Global Outlook: Loose Liquidity and Weak Dollar Expected to Boost Markets The correlation between Chinese and U.S. stock markets has increased this year. On one hand, abundant dollar liquidity in a loose monetary environment has catalyzed global risk assets, particularly benefiting emerging markets. On the other hand, the performance of China's computing power sector has been closely tied to U.S. tech giants. The 60-day rolling correlation coefficient between the S&P 500 and Wind All-A Index averaged 0.4 in 2025, significantly higher than 2021-2024 levels.
Despite November's adjustment in AI-related stocks due to "AI bubble" concerns and delayed Fed rate cut expectations, Industrial Securities believes U.S. AI stocks haven't entered bubble territory based on valuation comparisons, corporate balance sheets, and investment ratios. Looking ahead, global liquidity is expected to remain loose, with at least three more Fed rate cuts likely by end-2026. The weak dollar and loose global AI industry trends may boost A-shares.
II. Domestic Outlook: Earnings Recovery as Key Highlight China's corporate earnings have shown quarterly improvement, exceeding expectations. Non-financial A-share companies' revenue growth turned positive in Q2 2025 and continued rising, with Q3 cumulative revenue growth reaching 0.7%. Operating profit growth outperformed net profit growth, indicating improving earnings quality.
For 2026, nominal GDP recovery is expected to support corporate earnings. IMF projects China's nominal GDP growth (USD terms) to accelerate to 6.45% in 2026 from 3.46% in 2025. Industrial Securities estimates GDP deflator will improve to -0.12% in 2026 from -0.72% currently. Multiple leading indicators including medium/long-term loans and M1 growth suggest corporate profits may rebound significantly in 2026, with non-financial A-share net profit growth potentially reaching 16.5%.
Fiscal and monetary policies are expected to remain accommodative, supporting credit cycle recovery. As the first year of the 15th Five-Year Plan, 2026 will see stronger policy support for transformation and growth, further empowering the bull market narrative. The market may transition from 2025's TMT-dominated structural bull to a more comprehensive, sector-balanced bull market.
III. Liquidity: No Shortage of Funds in Bull Markets Industrial Securities maintains that "money is never the problem when direction reverses." Various funds are expected to continue flowing into the market in 2026:
1. Household Funds: The trend of allocating more to equities continues. Non-bank deposits have reached decade highs, while private fund issuance and margin financing activity indicate increasing retail participation. With interest rates at historic lows and real estate returns declining, equities are becoming the preferred asset class.
2. Active Equity Funds: Improved outperformance is driving fund issuance recovery. After significant redemption pressure in 2024-2025, active fund shares may rebound in 2026 as performance continues to improve.
3. Long-term Institutional Funds: Insurance funds have significantly increased equity allocations to 15.5% of assets, near record highs. With premium growth and persistent "asset shortage," systematic equity allocation remains the trend.
4. Foreign Capital: Overseas liquidity easing and RMB appreciation potential may drive foreign inflows. PPI recovery could particularly attract long-term foreign investors.
IV. Sector Allocation: From Valuation to Earnings, Structure to Breadth While 2025 saw a "survival race" among sectors with large performance dispersion, 2026 may feature a "speed race" as more industries enter earnings recovery. Key investment themes include:
1. Industry Trends: AI (North American computing power, domestic computing power, edge devices, software applications), new energy (energy storage, solid-state batteries), defense, and innovative drugs.
2. Price Increase Chain: Benefiting from PPI recovery, anti-involution policies, and AI capital expenditure transmission to physical goods.
3. Global Expansion: Chinese manufacturers demonstrating global competitiveness across autos, machinery, healthcare, and new energy.
4. Dividend Stocks: Shifting focus from stable dividends to free cash flow stocks that offer both yield and growth potential.
Risks include economic data volatility, slower-than-expected policy easing, and delayed Fed rate cuts.
Comments