According to a recent research report, the current structural rally in A-shares is approaching a high zone, while the potential for a broad-based market upswing remains to be unlocked, with June-July potentially serving as a window for rapid adjustments. The subsequent unlocking of a full-market rally, integrating more sectors into the major cyclical uptrend, will require the market trend to extend over time and deepen the logical underpinnings of the cyclical upswing. This includes the expansion of new economic industrial trends both domestically and overseas, the validation of cyclical improvements, and the increasing visibility of shifts in relative national strength. The forecast for a fresh round of market gains in the second half of 2026 remains unchanged.
Regarding sector selection, June-July may represent a consolidation phase for global technology stocks. During this period, earnings from the AI computing power chain are expected to materialize while stock price pullbacks help digest elevated valuations, awaiting further expansion of the AI industrial trend. Sectors capable of sustaining their growth momentum and digesting valuations through earnings performance in the medium term still possess opportunities to reach new highs. Subsequently, the technology rally is anticipated to become more diversified, with domestic AI supply chains and technological self-sufficiency also emerging as sources for new growth directions.
Assessing the Current Stage of the Major Cyclical Uptrend
The extent of the structural rally is nearing, but has not yet reached, the high zone seen in 2021. It is prudent to consider potential conditions that could lead to significant disruptions in the major cyclical uptrend: 1. Disruption of the positive feedback loop from incremental capital inflows. 2. Discrediting of the core industrial trend. 3. Significant macroeconomic headwinds.
Quantitative indicators suggest the structural rally is approaching a high zone. The proportion of stocks that have doubled in price has surpassed 2021 levels, though remains notably below 2015 and 2007 peaks. The market capitalization share of stocks trading at over 10 times price-to-book is comparable to 2021, but their market cap share is lower. The current "AI content" in the A-share market is approaching historical highs seen for internet-related stocks in 2015 and new energy stocks in 2021.
The report analyzes that the current environment does not yet possess the conditions for a major disruption in the cyclical uptrend, based on perspectives from the macro environment, the AI industrial trend, and the pattern of incremental fund inflows.
Macro Environment Unlikely to Face Sustained Pressure
The macro environment is not expected to face sustained downward pressure. The Strait of Hormuz opening and closing intermittently is considered the norm. The policy stance of the Federal Reserve is not viewed as restrictive; any potential interest rate hikes would likely be isolated. A slowdown in A-share earnings growth may occur in the third quarter of 2026 due to lagging cost pressures, but this is not seen as the start of a sustained downtrend. Earnings growth may improve further in 2027.
If sustained macro pressure were to emerge, risks appear limited primarily to the potential fallout from US-Iran tensions. The report offers two judgments on this: 1. The Strait of Hormuz will not remain permanently closed; intermittent openings and closures are the norm. 2. The Fed's policy inclination is not towards tightening.
The second and third quarters of 2026 could be a window with frequent macro disturbances, but the macro environment is not expected to face sustained pressure. While moderate disruptions within the major uptrend are possible, a major disruption due to macro factors appears unlikely.
AI Industrial Trend Possesses Depth, with Manageable Discrediting Risk
The AI industrial trend has significant depth, and the risk of it being discredited is considered controllable. On the application side, companies like Anthropic are demonstrating viable business models. Cloud providers are seeing strong revenue growth from integrating AI with cloud services, with operating cash flow largely matching incremental capital expenditure. Within the supply chain, cloud providers and industry players are collaboratively defining technology roadmaps, leading to an orderly supply landscape. The trend of high AI capital expenditure and recurring "compute inflation" continues.
Incremental Capital Focus Shifts from Institutional to Retail Investors
The focus for incremental capital is shifting from institutional asset allocation to equities towards retail investor allocation. Conditions are ripe for accelerated inflows from "later-arriving capital." While regulation of "early-arriving capital" may cause short-to-medium-term disturbances, the positive feedback loop from incremental inflows is still in a stage not easily disrupted.
This structural rally has seen the strongest incremental capital inflows in history. The core driver is a shift in household wealth allocation from non-equity to equity products, and a move by institutional investors from low to high equity allocations. This has made valuation expansion more prevalent in this rally.
Despite strong inflows, there remains room for further incremental capital, with the next phase likely driven by increased retail participation. The accumulation of positive returns in A-shares has reached a qualitative change, creating conditions for households to accelerate equity allocation.
Short-term resistance may stem from lessons learned in 2021, leading to market caution towards highly concentrated structural rallies. The market needs a narrative differentiating this cycle from 2021 to reinforce the positive capital inflow cycle.
Regulation of "early-arriving capital" is unlikely to trigger a major disruption, as the positive cycle is not yet fully saturated and "later-arriving capital" still has room to flow in. However, the concentration of recent inflows into tech themes corresponds to the rally approaching a high zone, potentially increasing market volatility. June-July, with frequent macro disturbances and potential adjustments in overseas tech stocks, could see a relatively rapid, moderate correction in A-shares.
How Will the Major Cyclical Uptrend Extend?
The dynamic that "the major uptrend is patient" remains unchanged. Over time, the structure of the uptrend can become more diversified, including within the technology sector itself. Positive factors to anticipate include: 1. Further progress in new economic industrial trends. 2. Broader validation of fundamental improvements. The increasing visibility of shifts in relative national strength provides logical depth.
Conditions for the market to break out again include: 1. Further advancement in new economic industrial trends, both overseas and domestically. The depth of China's tech industry is seen as underestimated. Technology will likely remain the main theme, but the uptrend's extension should see growth areas diversify rather than concentrate. 2. Broader validation of fundamental improvements. The conditions for this are favorable, with supply-side adjustments expected across more industries in 2026, improving supply-demand dynamics.
As more sectors potentially participate in sector rotation within the uptrend, the market's center could be elevated. Based on this, a positive incremental capital cycle could begin with a relatively balanced structure, driving A-shares towards a broad-based rally.
Core Conclusions on Market Outlook
The structural rally is approaching a high zone, while the space for a full-market upswing awaits unlocking. June-July may present a window for rapid adjustments. Subsequently, unlocking a full-market rally and integrating more sectors into the major uptrend requires extending the market trend and deepening its logical foundation. The forecast for a new round of market gains in the second half of 2026 stands firm.
Sector Selection Strategy
June-July may be a consolidation phase for global technology. The AI computing power chain will see earnings realization and price corrections to digest valuations, awaiting the next expansion of the AI trend. Sectors that can sustain growth and digest valuations through earnings in the medium term still have potential for new highs. Subsequently, the tech rally should diversify, with domestic AI chains and self-sufficiency as new growth sources.
The major cyclical uptrend is expected to feature broad participation. Medium-term opportunities are seen in new consumption, manufacturing companies expanding overseas, strategic resources, and non-bank financials. The market remains in a stage where fundamental certainty is more important than valuation elasticity. As the structural rally nears a high zone, the ability to digest valuations with earnings is critical.
Over time, an increasing number of sectors validating cyclical improvements will form the basis for a diversified uptrend. Specifically, for June-July, focus may be on sectors like optical communication, PCBs, memory, energy storage, gas turbines, and compute-power synergy. Later, the tech rally should broaden to include domestic AI supply chains and self-sufficiency, validated by rising venture capital interest in robotics and commercial aerospace.
Continuing to identify growth directions from post-US-Iran conflict global industrial shifts, focus areas include basic chemicals, new energy, and new energy vehicles. Strategic resources are also seen as core assets in this uptrend. New consumption represents a path of lesser resistance for pricing shifts in relative national strength.
Screening sectors based on earnings growth and reasonable valuation points towards new consumption, export chain leaders, and cyclical growth sectors. Additionally, non-bank financials, as the only "high-ROE, low-PB" primary sector, may play a role in a new market upcycle.
Risk Factors
Key risks include: 1) A breach of the baseline assumption regarding the Strait of Hormuz, leading to oil supply shortages and a deeper-than-expected global recession, impacting risk appetite. 2) A shift in the assumed Federal Reserve monetary policy path. 3) Major disruptions to the technology industrial trend or significant imbalances in global tech power, potentially derailing long-term market expectations and the rally. 4) Regulatory measures affecting capital supply and demand, potentially causing short-to-medium-term market disturbances.