Shenwan Hongyuan: The adjustment is just a "suspected bull market level."

**I. Adjustment is at the “suspicious bull market level”: The AI industry chain's “major industry trend is not finished + there are twists in the mid- and small-scale trends + temporarily insufficient cost performance in the major trend.” This is similar to the Growth Enterprise Market in early 2014, food & beverage in early 2018, and new energy in early 2021. Under such circumstances, the appearance of “high-level volatility” and an “adjustment phase” of a quarterly scale aligns with historical patterns.** Adjustment is also just “suspicious bull market level”: The “two-phase theory of bull markets” is a typical feature of A-share bull market cycles. After the adjustment, patiently wait for cyclical improvement in fundamentals + a new phase in the technology industry trend + a shift toward equity allocation in household assets + the resonance of China’s rising influence, to start the comprehensive bull market in phase 2.0. The “two-phase theory of bull markets” judgment remains unchanged. The high-level area judgment of bull market phase 1.0 is validated. “Two-phase theory” is a typical pattern in A-share bull market cycles: phase 1.0 (2013, 2017, and 2025) sees institutional investors complete their style switch + accumulating profit effects achieve qualitative change (public fund products of the previous issue peak return above the water level) + the industry trend’s assets show insufficient cost performance. The transition from bull market phase 1.0 to 2.0 (Feb-Oct 2014, 2018, and possibly H1 2026 this cycle) waits for comprehensive bull market conditions to accumulate + for the industry trend to consolidate after adjustment, to resolve cost performance issues. Phase 2.0 is the comprehensive bull market (2015, 2021, possibly H2 2026 this round), centered on cyclical improvement in fundamentals/new stages of industry trends + shift in household asset allocation toward equities. The “suspicious bull market level” adjustment is ongoing, but at this stage, conviction in the bull market outlook is even more essential. Once the adjustment reaches the core sector’s bull-bear dividing line, it can be considered a large-scale bottom, and one can wait for “bull market 2.0.” **II. After the adjustment, the spring rally is more worth anticipating: Achieving the 2035 goal of a moderately developed country requires maintaining a relatively high economic growth rate. The economy in Q3 2025 is relatively weak, and year-end lays out for the 2026 economy—“policy bottom” may be verified ahead of time. The short-term cost performance of tech growth has quickly improved, institutional investors have reduced tech holdings in the short term, and the microstructure is improving concurrently. Tech growth will also be an important part of sector rotations in spring.** After the adjustment, spring market prospects are more worth anticipating. We discuss two clues to spring market movement: 1. Leadership focuses on economic growth—“policy bottom” may be verified ahead of time. Achieving the 2035 goal of a moderately developed country requires maintaining a relatively high economic growth rate. The Q3 2025 economy is relatively weak; December 2025 is a key window for deploying 2026 economic policy, and “policy bottom” may be verified ahead of schedule. 2. The medium-term upward trend in the technology industry remains unchanged. The AI industry is still in “stage 3,” moving deeper into stage 3 and transitioning to stage 4, with nonlinear growth in industry profits. The domestic technology industry trend is also continuously advancing. Primary and secondary market linkage bottoming and rebounding is being validated (the bottom and recovery in fundraising in the primary venture capital market usually occurs in A-share structural bull years—2013, 2019, and 2025). From a cost performance perspective, short-term cost performance in tech growth has quickly improved, institutional investor tech positions decreased, and microstructure pressures have eased. There may be rebound opportunities in both cyclical and tech sectors in spring. **III. Outlook for industry style rhythm in 2026: In the transitional phase from bull market 1.0 to 2.0, high dividend defensive positions may be preferred. In bull market 2.0, tangible improvement in economic perception will catalyze cyclical sectors to lead index breakthroughs, but the core of the bull market will be the rising trend of technology industry and the global influence of manufacturing.** Spring 2026: Early verification of policy bottom + cyclical price hikes + PPI year-on-year improvement expectations, cyclical sectors may be the core assets of the spring rally, and cyclicals like basic chemicals and industrial technology still offer greater elasticity. Tech rebound will look for sectors where cost performance has cleared first; focus on innovative pharmaceuticals and defense/military industry. Spring also offers rebound opportunities for AI computing power, storage, energy storage, robotics, etc. Main Text: **I. Adjustment is at the “suspicious bull market level”:** The AI industry chain’s “major industry trend is not finished + there are twists in the mid- and small-scale trends + temporarily insufficient cost performance in the major trend”—this is similar to the Growth Enterprise Market in early 2014, food & beverage in early 2018, and new energy in early 2021. In such cases, “high-level volatility” and an “adjustment phase” of quarterly scale are in line with historical patterns. Adjustment is also just “suspicious bull market level”: “Two-phase theory of bull markets” is a typical feature of A-share bull market cycles. After the adjustment, patiently wait for cyclical improvement in fundamentals + a new phase in the technology industry + a shift toward equity allocation in household assets + the resonance with China’s ascending influence—to start the comprehensive bull in phase 2.0. Background and level of adjustment: Temporary insufficiency in cost performance in the AI industry chain—adjustment is intended to resolve cost performance issues. Market expectations for a straight-up bull market are rapidly revised downward. Drawing on historical experience, adjustment is at the “suspicious bull market level.” Currently, the implied ERP for communication, electronics, and STAR 50 is still some way from historical lows, but PE is already at absolute historical highs. At present, the AI industry chain’s “major industry trend is not finished + twists in mid- and small-scale trends + long-term low cost performance area,” which is similar to the Growth Enterprise Market in early 2014, food & beverage in early 2018, and new energy in early 2021. None of these three periods marked the end of the major market trend, but all experienced “suspicious bull market level adjustments.” Two historical insights of note: **1. High-level volatility phase:** Difficulty in making money from valuation increases. Even new industry catalysts or sustained high earnings growth make it hard to break upward, lending more toward rebound in a high-level oscillation band. Market sensitivity to liquidity shocks rises. The high-level volatility phase is usually at the quarterly level. Since September, the AI industry chain has been in a high-level volatility phase. In the short term, the probability of the Fed cutting rates in December is oscillating at low levels; less-than-expected easing triggered a global sell-off in high-standard assets (global tech stocks, gold, bitcoin), essentially due to insufficient asset cost performance and increased vulnerability, with a higher sensitivity to liquidity shocks. **2. Adjustment phase:** Typically triggered by distinct industrial disturbances (2014’s QR code payment was suspended due to security risks; 2018’s food & beverage sector was hit as the economy slowed and the fundamentals of baijiu came under pressure; 2021’s new energy vehicle sector was hampered by chip shortage, and a spike in upstream polysilicon prices suppressed downstream demand). These disturbances ultimately proved not to be the end of the industry trend, but precipitated a “suspicious bull market level” adjustment. The adjustment phase is also usually quarterly, making adjustment down to the bull-bear dividing line a reasonable magnitude. The “two-phase theory of bull markets” judgment remains unchanged. The high-level zone identification for bull market 1.0 is validated. The “two-phase theory” is a typical pattern of the A-share bull market cycle: bull market 1.0 phase (2013, 2017, and 2025), institutional investors basically complete their style shifts + efficient profit accumulation turns qualitative (NAV of public funds issued in the previous peak go above water) + the industry trend assets’ cost performance insufficient. The transition from bull market 1.0 to 2.0 (Feb-Oct 2014, 2018, possibly H1 2026 this round) involves waiting for comprehensive bull market conditions to accumulate + industry trend bottoming after adjustment, to resolve cost performance issues. Bull market 2.0 (2015, 2021, possibly H2 2026 this cycle) is comprehensive, centered on fundamental cyclical improvements、新产业趋势阶段 + 银行资产配置向权益迁移. The “suspicious bull market level” adjustment is happening, but it’s more important at this stage to solidify bull market conviction. Once the adjustment is complete (around the bull-bear dividing line of core sectors), a major bottom is formed, and “bull market 2.0” can then be awaited. **II. After the adjustment, the spring rally is more worth anticipating: Achieving the 2035 goal of a moderately developed country requires keeping the rate of economic growth relatively high.** Q3 2025 economy is weak; year-end is about laying out for the 2026 economy—“policy bottom” may be validated ahead of schedule. Short-term cost performance in tech growth is rapidly improving, institutional investors are reducing tech positions in the short term, microstructure is improving, and tech growth is also a key part of sector rotation in spring. After the adjustment, the spring rally has better prospects. We discuss two clues for spring market movement: 1. Leadership puts emphasis on economic growth—“policy bottom” may be verified early. Achieving the 2035 goal of a moderately developed country requires relatively high economic growth. 2025 Q3’s economy is relatively weak; December 2025 is a key window for formulating 2026 economic policy and “policy bottom” could be verified early. 2. Medium-term upward trend in the technology industry remains intact. AI industry is still in “stage 3,” deepening into stage 3 and transitioning toward stage 4, bringing non-linear profit growth to the industry. Domestic technology industry trends are advancing as well. Primary and secondary market interaction and bottoming rebound are being verified (the outperformance and rebound in primary market VC fundraising usually occurs in A-share structural bull years—2013, 2019, and 2025). From a cost performance angle, tech growth’s short-term cost performance has rapidly improved, institutional investor tech holdings have declined, and microstructure pressure has eased. Spring could see both cyclical and tech sector rebounds. **III. Outlook for 2026 industry style rhythm: Transition stage from bull market 1.0 to 2.0—high-dividend defensive positions could dominate.** Bull market 2.0 phase sees improvements in economic perception (actual improvement) catalyzing cyclical sectors to lead index breakouts, but the main line for the bull market will be the technology industry trend and the global influence of manufacturing. Spring 2026: Early policy bottom validation + cyclical price hikes + PPI year-on-year improvement expectation; cyclical sectors are likely to be the basic assets of the spring rally—basic chemicals, industrial technology and other cyclical alphas remain the more elastic direction. Tech rally will seek sectors with cost performance already cleared; focus on innovative pharmaceuticals and national defense/military industry. Spring will also see rebound opportunities for AI computing power, storage, energy storage, robotics, etc. **Source: Shenwan Hongyuan** **Risk warning and disclaimer** The market entails risks; investments require caution. This article does not constitute personal investment advice, nor does it consider individual users’ specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their circumstances. Investments made accordingly are at their own risk.