At the beginning of 2026, the A-share and stock index markets transitioned into a pattern of volatile consolidation after a round of gains. Analysts indicated that the earlier optimistic expectations based on policy and liquidity had largely been priced in by the market, and that the subsequent direction would depend on the strength of the economic recovery and improvements in corporate earnings.
"The stock index started the year with a strong upward trend, but entered a period of fluctuation in mid-month as policies cooled speculative sentiment in the market. On January 14th, the Shanghai, Shenzhen, and Beijing Stock Exchanges announced an increase in the margin requirement for financing transactions effective January 19th, aiming to curb excessive market speculation. Recently, broad-based ETFs have seen continuous net outflows, leading to market speculation that Central Huijin might be reducing its holdings," said Zheng Yuting, a stock index analyst at Guomao Futures.
Pu Zulin, Chief Macro Analyst at Zhengxin Futures, believes the market has now entered a rising phase driven by a positive liquidity feedback loop, particularly for the growth style dominated by technology stocks. Meanwhile, pro-cyclical sectors in traditional industries have undergone adjustments due to profit constraints and regulatory actions, resulting in the Shanghai Composite Index fluctuating at high levels while small and mid-cap segments continue their upward trend.
"Overall, the regulatory intent is to prevent the market from rising too rapidly and accumulating bubble risks. Therefore, measures such as reducing ETF holdings, monitoring unusual trading, accelerating IPOs, and restricting operations of hot money accounts are being used to moderate the market's ascent, with the aim of guiding it towards a high-quality 'slow bull' market," Pu Zulin stated.
Zheng Yuting believes that after this round of gains, although valuations for some tech themes have reached historically high levels, the overall valuation of A-shares remains at a neutral level. As of January 23rd, the Wind All-A Index's price-to-earnings ratio was 23.5 times, slightly lower than the S&P 500's 30.0 times and the Nasdaq Index's 42.0 times during the same period. "The current stance of regulators is to crack down on 'fake leaders that ride market hype without fundamental support,' rather than the 'popular sectors themselves.' Policy also continues to nurture a 'long bull' pattern for the stock index. Based on this, the regulatory direction balances guiding short-term market rhythm with fostering long-term steady growth, and the medium-to-long-term upward trend for the stock index is expected to remain unchanged," she said.
Furthermore, it was noted that the market recently exhibited a characteristic of small and mid-cap styles consistently outperforming large-cap blue-chip stocks. Indices representing small and mid-caps, such as the CSI 1000 and CSI 500, have also shown significantly stronger performance than large-cap indices like the CSI 300 and SSE 50, with the performance of IC and IM futures surpassing that of IH and IF futures. Zheng Yuting stated that the core driving factors are primarily two-fold: firstly, against a backdrop of moderate economic recovery and relatively ample liquidity, market risk appetite and capital are shifting towards small and mid-cap growth sectors aligned with national strategies (such as new quality productive forces, technological innovation, and high-end manufacturing); secondly, the recent continuous net outflows from broad-based ETFs, exemplified by the CSI 300 and SSE 50 ETFs, have led to speculation about position adjustments by institutions like Central Huijin, which has intensified the market's divergent structure.
According to Pu Zulin's introduction, the front-loaded fiscal policy efforts and accommodative monetary policy at the start of the year brought incremental liquidity to the market. Additionally, the maturity volume of household time deposits in 2026 is at its highest level in nearly five years, with over 60% maturing in the first quarter. It is expected that bank time deposit interest rates will fall to 1%-1.5%. Coupled with the favorable赚钱效应 of the stock market, some household deposits may opt to allocate to products with higher yields, such as insurance, bank wealth management products, and funds, thereby continuously injecting incremental funds into the stock market.
However, Pu Zulin noted that the stock market tends to amplify fluctuations in earnings expectations to a large extent. The stock market rise in 2025 was driven both by improved earnings and catalyzed by enhanced liquidity and risk appetite. This manifested as the market pricing in high valuations in advance due to optimistic expectations for the tech sector, while expectations for traditional industries remained relatively moderate. With the advancement of "anti-involution" efforts, since the fourth quarter of 2025, leading companies in some pro-cyclical sectors have already begun a wave of expectation-driven rallies based on earnings recovery, as seen in the recent strong performance of sub-sectors like airlines, chemicals, and building materials. However, the actual improvement in profits might only become evident in the second half of 2026.
Furthermore, Pu Zulin stated that pro-cyclical industries experiencing supply-side contraction and demand-side stabilization are expected to enter an earnings recovery cycle. Sub-sectors including photovoltaics, generic drugs, downstream real estate, culture and tourism, and transportation will undoubtedly provide more sustained bullish drivers for the stock market. Therefore, Pu Zulin believes that the pro-cyclical style has greater and more stable "staying power," while the growth style, led by technology, may continue to rise by momentum driven by liquidity, but requires attention to downside risks such as liquidity tightening.
"Historical experience shows that A-share bull markets are often first driven by risk appetite and capital inflows, followed by fundamentals taking over. Currently, the driving force from capital remains strong, while the economic fundamentals are still in a bottoming-out phase. It is expected that the improvement in corporate profit structures and the rotation of market styles still await further efforts from policies aimed at expanding domestic demand and the emergence of clearer positive signals from economic data," Zheng Yuting said.
