Goldman Sachs remains bullish on Chinese stocks: AI and overseas expansion support profits, MSCI China expected to rise 20% this year.

In its latest 2026 China market outlook report, Goldman Sachs has issued a strong bullish signal on the Chinese stock market. The bank expects that, driven by accelerating corporate earnings growth, the MSCI China Index and the CSI 300 Index will rise by 20% and 12% respectively in 2026, and continues to maintain an “overweight” recommendation for A-shares and H-shares.

According to ZF Trading Desk, Goldman Sachs China equity chief strategist Jingjin Liu’s team noted in a report released on the 7th that, after last year’s valuation recovery, the upward momentum of the market in 2026 will mainly shift to earnings-driven factors. The bank forecasts that, benefiting from artificial intelligence (AI), Chinese companies’ overseas expansion, and anti-involution policies, profit growth for Chinese-listed companies will accelerate from 4% in 2025 to 14%. Especially in the TMT (Technology, Media and Telecom) sector, earnings are expected to grow by around 20% due to AI monetization and increased capital expenditures.

On the capital flow front, the report projects that net southbound capital inflows will hit a record high of $200 billion in 2026; at the same time, domestic asset reallocation may bring an incremental RMB 3 trillion to the stock market. Moreover, with buyback policies advancing and improved corporate cash flows, total annual dividends and buybacks are expected to reach nearly RMB 4 trillion, providing investors with substantial cash returns.

Regarding market valuation, Goldman Sachs notes that the current MSCI China Index P/E of 12.4x is at a mid-cycle level, and is reasonable relative to their macro forecasts. However, the bank stresses that, considering the realization of AI commercialization, more aggressive fiscal stimulus, and the potential for liquidity overshoots, the market still has highly attractive upside potential.

Earnings-driven: AI and Overseas Expansion as Dual Engines

Goldman Sachs explicitly points out that “No earnings, no returns” will be the main theme of the market in 2026. After a 20%-30% rise in 2025 mainly driven by valuation expansion, future market performance will depend heavily on actual earnings delivery. Goldman Sachs predicts that earnings growth for the MSCI China and CSI 300 indices will accelerate to 14% in 2026 and 2027, much higher than the single-digit level in 2025.

This optimistic forecast is mainly based on three core drivers: artificial intelligence, overseas strategies, and anti-involution policies. Goldman Sachs especially favors the TMT sector, projecting that profits in the internet and hardware industries will grow by about 20% due to AI monetization progress and increased capital expenditures. Furthermore, despite potential trade frictions, Goldman Sachs believes that China’s exports will continue to grow in 2026, especially for globally competitive industry leaders, who will continue to benefit from high profitability in overseas markets.

As for sector allocation, Goldman Sachs advises investors to focus on the “China Outstanding 10” companies, which are well positioned amid loose regulatory environments and breakthroughs in AI technologies. In addition, Goldman Sachs has upgraded hardware technology to “overweight”, seeing it as a key beneficiary of AI development and self-sufficiency strategies.

Capital Flow: Southbound Funds May Hit Record High

Goldman Sachs is optimistic about the capital flow into the stock market in 2026, expecting continued long-term capital inflows into the Chinese market. Among these, southbound capital is considered a key force, with annual net purchases forecast to reach $200 billion, setting a new all-time high. This is mainly due to the expansion of southbound investment channels, the A/H share premium maintaining a high level at 37%, and the attractive dividend yields for onshore investors in the Hong Kong stock market (Hang Seng China High Dividend Index yield at 5.7%).

Aside from southbound funds, domestic institutional investors’ asset reallocation will also be an important incremental source. Goldman Sachs estimates that as risk-free rates decline, long-term funds such as insurance and pensions will increase demand for high-dividend equity assets, potentially driving approximately RMB 3 trillion of domestic funds into the stock market. At the same time, as global mutual funds’ underweight positions in Chinese stocks narrow, every 100 basis points of portfolio adjustment could bring about $16 billion in buying demand.

Corporate payout actions themselves also constitute strong capital support. Goldman Sachs expects that, supported by policy and robust operating cash flow, buyback volumes for Chinese-listed companies may grow 20% in 2026. Combined with dividends, total payouts to shareholders could approach RMB 4 trillion for the year.

Sector Allocation: AI is Changing the Game

In terms of sector allocation, Goldman Sachs maintains an overweight rating on internet/media & entertainment, online retail, technology hardware (upgraded from neutral to overweight), materials, and insurance. The hardware technology segment covers many product supply chains. Goldman Sachs technology analysts are optimistic about smartphones, AI servers/data centers (including cooling systems), semiconductors, and physical AI applications (like robotics), while remaining selective on personal computers.

Goldman Sachs says internet and retail platform companies are building comprehensive AI ecosystems, covering semiconductors, large language models, data centers, and AI applications. Losses from food delivery subsidies should ease in 2026, and rising AI capex may boost earnings. Compared to their US counterparts, these companies offer attractive growth and valuation tradeoffs, with a sector PEG ratio of just 0.5.

The insurance sector saw improved premium growth in the second half of 2025, and may further benefit from the trend of cash moving into investment driven by falling real interest rates. Stabilizing bond yields and positive equity beta could boost total investment returns. Current sector valuations remain attractive, with a forecast P/E ratio of 7.1x and P/B ratio of 1.0x.

New infrastructure and AI investments are becoming new contributors to growth. Anti-involution policies have slightly improved pricing power in certain sub-industries plagued by overcapacity. Goldman Sachs commodity strategists continue to favor precious metals, especially gold.

Valuation and Policy: Risk Premium Has Further Room to Compress

Although the Chinese stock market has seen a significant rebound over the past year, Goldman Sachs believes that current valuations remain attractive. The dynamic P/E ratios for the MSCI China Index and CSI 300 Index stand at 12.4x and 14.5x respectively, near mid-cycle levels. However, compared with global markets, the MSCI China Index still trades at discounts of 38% and 11% to developed markets and other emerging markets (excluding China), respectively.

Goldman Sachs’ macro model shows year-end target P/E ratios for the MSCI China Index at 13x and CSI 300 at 15x. This suggests current market prices have yet to fully price in AI-driven tail risk options, potential policy stimulus, and liquidity overshooting. Goldman Sachs notes that A-share equity risk premium (ERP) remains high, and as the domestic risk-free rate falls, ERP still has room for further compression, which would support higher valuations.

On the policy front, Goldman Sachs sees 2026 as the starting year of the 15th Five-Year Plan, and expects the policy window to remain friendly to the market. In addition to monetary and fiscal policy support, regulators’ attitude toward the private economy will remain loose, and the strategic importance of the stock market as a venue for resource allocation and wealth creation will continue to rise—all factors that will ensure stable market operations.

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The above highlights are from ZF Trading Desk.

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