AI's fundamental question: The economy is still booming, but what about the market?

A boom is the starting point of a market trend, but it is not the entirety of the trend. The latest research from the strategy team of Guotou Securities points out that the fundamentals of A-shares continue to improve. In the first half of 2026, the growth rate of non-profits of all A-shares will return to double digits for the first time since 2021. Technology and overseas expansion are leading a new round of profit cycle. However, whether the boom can be realized into a market trend and how high the market can go depends on a systematic framework for pricing boom trends.

In their report, Guotou Securities strategists Lin Rongxiong and Peng Jingtao innovatively proposed a three-factor pricing model for economic conditions: the difference between capital expenditure and profit growth rate, the second derivative of profit, and net profit margin. This model aims to answer three core questions: buy signals, sell signals, and the extent of market movement. The report points out that the semiconductor, communication equipment, consumer electronics, gaming, and battery sectors are currently in a "double-sided upward trend," with AI hardware and overseas expansion being the core areas of convergence. Fundamental sell signals are still far off, while signals for heavy holding during the main upward phase are clear.

From a macroeconomic perspective, excluding finance, the profit share of technology and overseas expansion is approaching 50%. Referring to the "30%-60%" profit pattern of A-shares—the upstream cyclical sector in 2005 and the consumption and real estate sectors in 2016, both triggered a new round of upward profit cycles after their share exceeded 50%—the main players in this round are likely to be technology and overseas expansion, and A-shares are ushering in a new profit cycle.

Three-Factor Pricing Framework: How Economic Conditions Transform into Market Trends

Guotou Securities breaks down the economic climate into three trackable core indicators, forming a complete closed loop of the production capacity-profit cycle.

The first indicator is the difference between capital expenditure and profit growth rates, which serves as a buy signal. This indicator essentially depicts the difference in pace between industry supply expansion and profit realization, leading profit inflection points by 2 to 4 quarters. When capital expenditure growth consistently exceeds profit growth, it signifies aggressive capacity expansion, directly targeting supply release pressure over the next 1 to 2 years. Conversely, when capital expenditure growth consistently falls below or even negative for profit while profits are still recovering, it indicates that capacity clearing is underway, often paving the way for the next round of economic growth. Operationally, a negative and narrowing difference corresponds to a confirmed buy signal of supply clearing, while a significantly positive and widening difference is a warning sign of a market top.

The second indicator is the second derivative of profits, which serves as a selling signal. This indicator characterizes whether "the rate of profit growth is accelerating or slowing down," and is a direct driver of valuation expansion or contraction. A positive second derivative is the earliest financial confirmation signal of an inflection point in the economic cycle; a negative second derivative is the first warning sign of a peak in the economic cycle, typically leading the peak of net profit margin by 1 to 2 quarters and the peak of stock price by about 1 quarter. Accelerated profit growth corresponds to holding during the main upward phase, while a peak followed by a decline, with the absolute growth rate still high, is a selling signal.

The third indicator is net profit margin, which determines the market's potential. Net profit margin is the most intuitive of the three, but also the easiest to misinterpret, reflecting the cumulative result of industry pricing power and supply-demand dynamics. A record high net profit margin means valuation is overextended and room for further growth; a rebound from the bottom signifies a double boost from both earnings growth and valuation expansion. Historically, market peaks often occur in a double-high phase: a peak in the second derivative followed by a decline, but with continued high growth rates and a historically high net profit margin.

The three indicators are not isolated, but form a closed loop: high net profit margin attracts capital expenditure → widening gap → future supply increase → net profit margin under pressure → second derivative turns negative → enterprises reduce capital expenditure → gap narrows → supply clearing → net profit margin rebounds → second derivative turns positive.

Eight economic cycles: The complete path from clearing to a double whammy

By exhaustively listing the combinations of the three factors, eight economic states can be obtained, which evolve along six stages: "clearing → repair → reversal → prosperity → peak → major decline".

The four phases of the contraction group are as follows: Clearing and bottoming out (capital expenditure contraction + profit slowdown + net profit margin decline, awaiting the dawn); Quality-first bottoming out on the right side (capital expenditure contraction + profit slowdown + net profit margin recovery, net profit margin recovers first, signal for phased left-side positioning); Initial recovery with volume supplementing profit (capital expenditure contraction + profit acceleration + net profit margin decline, volume precedes price, rebound elasticity is discounted); Double-click main upward starting point (capital expenditure contraction + profit acceleration + net profit margin recovery, both profit quality and slope improve, signal for heavy buying).

The four phases of the expansion group are as follows: Peak of Prosperity (capital expenditure expansion + accelerated profit growth + new high net profit margin, both volume and price rising, nearing the peak of euphoria, signal for phased profit realization); Price War with Increased Revenue but Not Increased Profit (capital expenditure expansion + accelerated profit growth + declining net profit margin, focusing only on cost leaders); Peak of Growth (capital expenditure expansion + decelerated profit growth + still high net profit margin, M-top risk, decisive sell signal); Double Kill Main Decline (capital expenditure inertia expansion + decelerated profit growth + declining net profit margin, decisive avoidance, sell-off signal).

Historical case studies confirm that buy and sell signals have been repeatedly validated.

Guotou Securities validated the effectiveness of the above framework with eight industry case studies.

The electronics industry (AI hardware) is a typical example of a contraction-driven buy signal: the contraction of capital expenditure in 2024, coupled with the return of profits, confirmed the buy signal. In 2025, the second derivative of profits continued to accelerate, and the stock price has risen by about 265% cumulatively from the low point in 2024. Currently, it is still in the profit release stage and the profit margin is rising. The double-double logic has not yet been completed.

The power equipment industry (new energy) has verified the expansion group's "double selling signal" pattern: the growth peak in 2021 corresponds to the trading peak, and the growth peak in 2022 corresponds to the fundamental peak, forming an M-top double selling signal; after the clearing in 2024, profits turned positive, and in 2025, the capital expenditure-profit growth rate converged again, confirming the buying signal, and the stock price rebounded by a cumulative 111%.

Communication equipment is the most relevant example: net profit growth has been rising continuously since 2024 (+83% in Q2 2026) and capital expenditure has contracted, forming a new round of buying signals. AI computing power has driven the stock price to rise by a cumulative 732%. At present, the net profit margin has reached a historical high. The core of tracking subsequent selling signals is whether the second derivative of profit has peaked and fallen back.

The liquor industry provides a contrasting example: net profit growth peaked in 2021 and then declined, turning negative in 2025, with no buy signal combination appearing throughout the process; the stock price declined for a long period after the second peak in Q2 2021 (cumulative +82%), down to -40%, validating the judgment to avoid the market until now.

Photovoltaic equipment is a typical example of "overspending on capacity expansion": After high growth in 2022, the industry entered a race to expand capacity, and in 2023, the capital expenditure gap widened significantly, which was a warning of oversupply; the deepest loss in 2024 to 2025 reached -194%, and the stock price has accumulated a -42% decline from its peak. It is still in a quagmire of fundamentals, and it is not advisable to rush into the market before the clearing is completed.

Current A-share market sentiment: Double-double upward movement is the main theme of the market.

Based on a three-factor pricing model, Guotou Securities has analyzed the secondary sub-segments of the A-share market and divided the current market into three levels.

The clearing-out and bottoming-out phase mainly involves the real estate chain and some midstream sectors: Photovoltaic equipment losses widened to -13.6 billion yuan in the first half of 2026 (7.6 billion yuan in Q2 alone), and the clearing-out is not yet complete; real estate development losses narrowed by 17% but sales have not recovered; the decline in liquor sales widened to -21% in Q2; and the aquaculture industry turned from profit to loss. We maintain observation and await signals before confirming a profit inflection point.

The recovery and upward trend is concentrated in the cyclical and pharmaceutical sectors where supply has been fully cleared: Coal mining growth turned positive to +28.9% in the first half of 2026, and the Q2 single-quarter growth of +68% confirmed the right side of the profit bottom and recovery; Refining, chemical fiber, and chemical raw materials accelerated to +76%, +151%, and +100% respectively in Q2; After the clearing of centralized procurement of medical devices, the net profit of 2026E increased by 55%, and the overseas business development of innovative drugs has been realized. All of these are in the recovery range with clear signals of phased deployment.

The double-top upward trend is precisely the main theme of the current market: the net profit growth rate of semiconductors rose from +167% in Q1 2026 to +236% in H1 2026, and reached a high of +279% in Q2 alone, with the net profit margin rebounding significantly to 19.1% (an increase of 11.8 percentage points compared to H1 2025); communication equipment saw the strongest reversal with +101% in Q2 and biopharmaceuticals with +141%; AI hardware and overseas expansion are the core intersections, and the signal for heavy holding during the main upward phase is clear.

The report specifically points out that the current readings are similar to those seen when electronics and communication equipment started to rise in 2024 and 2025, respectively, and are completely different from the "double high" selling signals of new energy in 2021 and coal in 2022. Fundamental selling signals are still far off. The key to success in holding positions is not guessing the top, but tracking when the second derivative of profits will peak and fall, and whether net profit margins have overextended themselves to new highs.

A New Profit Cycle: Technology and Overseas Expansion Reshape the Profit Landscape of A-Shares

From a macroeconomic perspective, the profit structure of A-shares is undergoing a profound reshaping. In the first half of 2026, the growth rates of all A-shares and the two non-profits of all A-shares were 16.82% and 16.22% respectively, which is a significant increase compared to the first quarter of 2026 (7.27% and 12.32%). The year-on-year growth of the two non-profits of all A-shares has returned to double digits for the first time since 2021.

Structurally, currently about 25% of A-share revenue and 30% of profit come from overseas. Excluding finance, the profit share of technology and overseas expansion is close to 50%. Referring to the "30%-60%" profit pattern of A-shares, the "Five Golden Flowers" market was triggered after the upstream pro-cyclical profit share exceeded 50% in 2005, and the "Beautiful 50" market was triggered after the consumer and real estate sectors exceeded 50% in 2016. Currently, the proportion of technology and overseas expansion is approaching a critical point, and a new round of upward profit cycle is unfolding.

The K-shaped economic trend continues: capital expenditures in TMT and high-end manufacturing have increased significantly, showing a clear divergence from traditional sectors such as construction, building materials, steel, and food and beverage. On the financial statements, TMT and high-end manufacturing show continued improvement in both year-on-year revenue and net profit, while traditional sectors are still bottoming out.

In terms of overseas expansion, the Tonghuashun Overseas 50 Index saw revenue growth of 20.53% and net profit growth of 29.99% in the first half of 2026, significantly outperforming the entire A-share market; its ROE reached 18.63%, close to 20% and far higher than the average level of the entire A-share market, demonstrating excellent profitability and a favorable economic growth rate.

At the index level, the profit growth rate in the first half of 2026 was ranked as follows: STAR Market 50 (+202.97%) > ChiNext Index (+52.21%) > CSI 500 (+31.99%) > CSI 300 (+21.34%) > CSI 1000 (+14.20%). The ChiNext Index had the highest ROE at 15.44%, making it the best representative index of the upstream and midstream prosperity of the technology hardware and overseas expansion sectors.

Guotou Securities concludes that economic conditions determine the direction, three factors determine the pace, and the direction lies in technology and overseas expansion. These two forces are reshaping the profit landscape of A-shares, driving the transformation of China's macroeconomy from old to new drivers, and forming a group of new core assets in the A-share market with industrial transformation and upgrading capabilities and global competitiveness.

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