Shenwan Hongyuan Annual Strategy: Bull Market 2.0 will unfold in the middle of 2026; after the adjustment, a more comprehensive bull market will emerge.

Shenwan Hongyuan Annual Strategy: Bull Market 2.0 will unfold in the middle of 2026; after the adjustment, a more comprehensive bull market will emerge.

On November 18, at the Shenwan Hongyuan 2026 Investment Annual Conference, the Shenwan Hongyuan strategy team released its 2026 annual strategy report. In this report, Fu Jingtao, Chief A-share Strategy Analyst at Shenwan Hongyuan Research, shared the team's latest views on the outlook and rhythm of the future bull market.

Fu Jingtao believes that the current first stage of this bull market has gradually entered its latter phase. After spring 2026, the technology sector may see consolidation and adjustment, but the bull market will not end. In the second half of 2026, a more comprehensive bull market is likely to unfold progressively. Next year’s investment opportunities will outnumber this year’s.

Golden sayings:

1. In the second half of 2026, there will be a 2.0 phase of the bull market. This stage should be a more comprehensive bull market than the 1.0 phase.

2. The long-term cost performance of the AI sector is already insufficient. According to historical experience, there will be a stage of high-level volatility. This adjustment will be significant, but it is not the end of the major trends, and after the adjustment, the market will turn upward again.

3. As China's competitiveness continues to be confirmed, the corresponding external cycle is moving from "following" to "leading," which is an inevitable trend. In the future, A-shares should embrace competitive thinking.

4. During the "structural bull" stage, valuation rises are mainly driven by prosperity. When the comprehensive bull market arrives, incremental competition and marginal capital cost pricing will bring room for valuation re-rating.

5. We remain optimistic about technology in the major cycle, but why do we need to point out the upcoming period of volatility and adjustment? Because this stage is historically significant, and a reasonable adjustment is probably toward the "bull-bear dividing line."

6. If overseas giants’ capital expenditure growth slows down next year from a high base, this may trigger a mid-level adjustment in the AI sector and possibly lead to an overall market correction.

7. The overall supply-demand pattern in 2026 will be "supply clearing + stable demand," which will ultimately improve the profitability of listed companies. So, next year's opportunities will be greater than this year's.

8. 2026 may see two "firsts in five years." First, for the "first time in five years," A-share profitability will effectively rebound. Second, for the "first time in five years," the year-on-year growth rate of net profit attributable to parent shareholders will reach double-digit positive growth.

9. Before spring 2026, technology may see a rebound. During the transition from bull market 1.0 to 2.0, high dividend and defensive stocks may outperform in phases.

10. In 2026, residents’ assets are likely to move toward equity assets, and the stock market will usher in an environment of comprehensive incremental capital.

(First-person narration, some content omitted.)

The "Two-Stage Theory" of the Bull Market

About this time last year, the Shenwan Hongyuan strategy team released the annual strategy for 2025, and was the first to discuss the bull market. Since then, every major report has had “bull market” in its title, with the main topic revolving around the bull market.

Over the last year, the A-share index has consistently stepped up, and now there is no longer any disagreement about the A-share bull market. So, I think we need to discuss the market with greater detail.

Therefore, today we focus on the depth and structure of the bull market, and our central conclusion is, as the title says, “Two-stage Theory of the Bull Market.”

In our view, the current bull market's first stage (Stage 1.0) is in a high-level area. It is expected that after spring 2026, technology stocks may undergo an adjustment characterized by “doubts about the bull market.”

But this correction is not the end of the bull market. In the second half of 2026, there will be a second stage (2.0), which should be more comprehensive.

A-shares Need to Embrace a “Global Competition” Mindset

Here, I want to first discuss a long-term macro change, which is that intensifying global competition is a reality we cannot avoid. A-share investment needs to adapt to and even embrace this competition.

We have seen that optimizing the external cycle is a major theme in the 15th Five-Year Plan. Opening up moves from “following” to “leading,” directly confronting competition for discourse power and strengthening “competitive thinking.” In fact, the US-led process of globalization has long been stalled. The dividends China enjoyed as a “follower” are limited, and as China's competitiveness is increasingly confirmed, moving from “following” to “leading” is the general trend.

Future competitive events may still impact market risk appetite, but the effects will be only pulse-like. Moreover, each overseas disruption in the future will be a chance to reaffirm China’s rising competitiveness. Under the thinking of “leading” and competition, the A-share market should undergo changes.

A-shares should embrace "competitive thinking," without fear of competition: Competitive events may still impact risk appetite, but intensifying competition is a reality. A-share market pricing can reflect the wins and losses in competition, as well as changes in expectations for the competitive endgame.

Digest First, Then Turn Upward Again

After discussing these major long-term changes, let’s turn to the core logic of the two-stage bull market theory.

First, we believe that we are currently in a high-level region of bull market 1.0; the long-term cost performance of A-share AI sector is already insufficient, so based on historical experience, a high-level volatility stage will follow, with an adjustment substantial enough to arouse doubts about the bull market. However, this is not the end of the major tech trend; after digesting the long-term cost performance issue, there will be another upward trend.

When assessing long-term cost performance, we mainly look at the implied ERP, i.e., the equity-bond cost performance ratio, which fits the typical bull-bear cycle well. But there’s a current issue: the interest rate center has dropped, and the implied ERP center may also be shifting, reducing effectiveness.

Based on overseas experience, the extreme value of PE at this stage can be a reference for long-term cost performance. Currently, for communications, electronics, and SSE STAR 50, which are the representative structural bull assets this year, their implied ERP is not at extreme values, but their PE readings have reached historic highs. We characterize this pattern as: the industry’s major trend is not over, but there will be medium and small waves of volatility; long-term cost performance is already inadequate. This resembles the trends in the beginning of 2014 for the ChiNext, early 2018 for food and beverage, and early 2021 for new energy. None of these marked the end of major trends, but all saw quarterly high-level volatility and corrections.

Three Important Experiences from History

Three important historical lessons should be noted here:

First, in the high-volatility range for such assets, it becomes significantly harder to increase valuations. New industrial trend catalysts and performance verification are more likely to cause rebounds within the high-volatility range than the breakthroughs people expect.

Second, correction waves are usually triggered by clear industrial disturbances. While these disturbances are not the end of the trend, the magnitude of the correction is notable. In early 2014, corrections in computers and media were triggered when QR-code payments were suspended for security reasons, a major shock in mobile payments and internet finance. From March to May 2014, computers corrected sharply; in August, major internet finance policies and QR-code payment policy restart led to a renewed bull trend in internet finance during the 2015 bull market. Similar cases occurred with food & beverage in 2018 due to economic slowdown and pressure on fundamentals, but a later upward trend in prosperity, price, and profits drove bulls until early 2021; new energy in early 2021 hit a stage adjustment due to EV chip shortages and upstream price surges, but rebounded after Q2 when these problems were resolved.

We remain optimistic about tech in the major cycle, but why highlight the volatility and adjustment phase? Because the magnitude is significant historically—the volatility and correction waves both run on a quarterly scale, and the reasonable correction should be to near the bull-bear dividing line. Thus, we call this a "doubt-the-bull-market" adjustment.

Third, naturally, a decline in the risk-free rate is positive for equity valuation, but when can we actually profit from valuation re-rating? Typically, during a structural bull, valuation rises are driven by prosperity, and only in the comprehensive bull stage does incremental player entry and marginal funding cost pricing open up the space for higher valuations. At this stage, for AI-related industries and some new energy sectors that have recently surged, it is hard to break through PE’s historical highs.

More Opportunities in the Coming Year Than This Year

We believe that there is still a 2.0 coming in the second half of 2026, when fundamental cycle improvement, new industrial trends, shifts in resident asset allocation, and China's rising global influence will converge, resulting in a truly comprehensive bull market.

Regarding cyclical improvement in fundamentals, we flagged the 2026 supply clearing in midstream manufacturing for a full year, and data has fully validated our forecast. Now, the clues for supply clearing in midstream manufacturing in 2026 are clear. Capital expenditure is bottoming at about -25% per year; projects under construction are decreasing by about 1/6 to 1/7 annually, which leads to the growth rate of fixed asset formation at year end being around 2%-3%, possibly the first time in five years that supply growth lags demand growth.

We know A-share revenue growth is typically around 5% on the demand side, and has been lower in recent years. This brings two mid-level important changes:

First, the number of segments and stocks in supply clearing will notably increase. In all segments related to anti-involution, supply clearing in 2025 was less than 10%, making it hard to find inflection points. But in 2026, over 75% of segments will see easing supply pressure, and at least 20% will newly achieve supply clearing. This means we’ll have to reduce the weight on the supply side in routine research; demand improvement equals profit growth, which equals share price rise—and thus institutional investors’ bottom-up stock-picking success rate naturally increases.

Second, the effectiveness of the sequential framework of policy, market, and economic comparison returns on total levels. In normal cases, if the economy is weak at the start of 2026, further policy stimulus is highly probable down the line. The phase verifying the policy floor is very likely the time when bull market 2.0 begins.

Next Year’s Overall Supply-Demand Pattern: “Supply Clearing + Stable Demand”

On fundamentals in 2026, the visibility of supply clearing remains very high, but the main disputes in the market are on the demand side. There are two sources of demand improvements worth noting:

First, if the economy is still weak and policy tight in early 2026, the probability of a “policy floor” in the second half is extremely high.

Second, external demand may not necessarily be poor. For two reasons: first, globally, there is a policy stimulus cycle, especially in the US, Europe, and Japan; second, regardless of the global economic beta, trade ties between China and non-US economies are becoming more intimate, and China’s external influence is trending upward. Therefore, finding highlights on external demand and exports should remain an important direction for 2026.

Overall, “supply clearing + stable demand” equals improved profitability. If there are new highlights on the demand side, that means new structural investment opportunities. So, next year’s opportunities are clearly greater than this year’s, and we see this judgment as highly certain.

To translate this into profit forecasts, we note that in 2026 there may be two “first-in-five-years” events.

First, for the first time in five years, A-share profitability will rebound effectively;

Second, for the first time in five years, the year-on-year growth rate of net profit attributable to parent shareholders will record double-digit positive growth.

Three Major Clues for Next Year

Finally, a brief discussion of structural characteristics.

Looking ahead to style and rhythm in 2026, we believe bull market 1.0 is already in a high-level area. Before spring 2026, technology may rebound; in the transition from bull 1.0 to 2.0, high dividend and defensive sectors may be temporarily dominant; in 2.0, cycle sets the stage, growth takes the lead, and ultimately technology trends plus upgraded global influence in advanced manufacturing should be the main line. Our three major clues for 2026:

    1. Trading on PPI turning positive.

    2. Technology industry trends.

    3. The rising influence of manufacturing.

For cyclicals, just know the timing. PPI turning positive only matters until spring 2026; spring is the key verification period—from then on, it’s “resurgence trades,” and if resurgence is delayed, related stocks should adjust. The later it gets, the more you should favor cyclical Alpha, or directions with extra supply-demand logic.

Second, tech trends will remain present in the 2.0 stage. AI industry trends still have space, and China’s tech is also advancing. One observation I want to share, which we are now verifying: 2025 is a structural bull year; historically, structural bull years are low points for linkage between primary and secondary markets, which then keep trending upward. So, over time, new investable directions in tech should continue to increase—like humanoid robots, storage PV, pharma, military industry, and other undiscovered new routes—all will be key focuses next year.

Finally, the rise in manufacturing influence is also a key structure for the bull market. By end-2026, as midstream manufacturing clearing is widespread, demand highlights equal profit improvement. During the uptrend phase for fundamentals, the rise of global manufacturing competitiveness tends to be quickly confirmed, and logic for valuation re-rating trends faster. Thus, improved supply-demand structure in sectors like PV, energy storage, as well as early-pricing for rising overseas influence (chemicals, engineering machinery, etc.), should be main focus sectors next year.

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