Shenwan Hongyuan Group Co.,Ltd. (000166) has released a research report stating that in 2026, A-shares will still operate within the framework of the "two-stage major band advance," though the first-stage advance in 26H1 will be of a higher magnitude, and the correction phase in 26H2 will be correspondingly larger; however, investors should not abandon expectations for the "second-stage advance," which is expected to complete its construction by 27H2, with investment returns potentially exceeding those of 2026. On the AI application side, there remains room to open new tracks, which is an objective judgment, and the AI industry continues to advance, which is also an objective trend. The next major band advance will most likely still be driven by the AI industry trend.

In the long term, A-shares are in a correction phase between the two stages of advance at a magnitude comparable to 2018. In the medium term, the absolute-defense-dominated unilateral correction is already in its latter phase, and what may follow is a volatile phase with active bottom-level themes, which is a necessary process for constructing the "second-stage advance." In the short term, oversold rebound momentum is accumulating, the supply-demand balance of funds is being rebuilt, and a spring rally in 2027 around the turn of the year can be expected, with an earlier oversold rebound also being reasonable. The main views of Shenwan Hongyuan Group Co.,Ltd. (000166) are as follows:

At the current stage, problems objectively exist at the levels of asset allocation environment, core industry trends, and stock market liquidity, and there are no specific clues for a turnaround yet. Only the improvement of short-, medium-, and long-term cost-effectiveness has a clear timetable. At this point, extrapolating cautiously is easy, while discussing a reversal is difficult. Has the 2026 A-share market broken through historical patterns? The firm believes that the market may still be operating within the "two-stage major band advance" framework. It is just that the "first-stage advance" in 26H1 is of a higher magnitude, and the "correction phase between the two stages" in 26H2 is correspondingly amplified. But amid adversity, expectations for the "second-stage advance" should seemingly not be abandoned. On the AI application side, there remains room to open new tracks, which is an objective judgment, and the AI industry continues to advance, which is also an objective trend. When the pricing corrections for AI computing power inflation become sufficiently priced in, the outlook on the AI industry trend should also gradually shift from guarding against negative factors to anticipating positive factors. Objectively viewing current problems while thinking about the turning point in 2027 and seeking breakthroughs at both the aggregate and structural levels may be exactly the questions that need to be answered in the 2027 annual strategy.

First, the report discusses what key issues the correction starting mid-2026 reflects, and the medium-term turning points for these issues. 1. The 2026 advance and correction waves exhibit symmetric characteristics in terms of supply and demand of funds: during the advance, extreme divergence under stock-game conditions, with track-focused funds leveraging gains through positive feedback loops; during the correction, broad deleveraging across all types of funds under encirclement, with concerns about allocation-type funds and absolute-return funds reducing positions driving negative feedback loops in capital flows. At present, all types of funds have generally reduced positions, because net values have fallen back near break-even lines, and the proportion of allocation-type funds forced to concentrate position reductions has increased. The conditions for restoring short- to medium-term supply-demand balance of funds have improved. However, track-focused funds and allocation-type funds still hold high positions in the computing power chain, which have not yet been cleared in the long term. New industry trends, a certain degree of position rebalancing, and policy and institutional adjustments are the conditions for long-term clearing. During the 2026 advance and correction waves, both fundamental and capital flow logics are symmetric. In the advance wave, fundamentally, the computing power inflation logic kept spreading; in terms of capital flows, track-focused funds leveraged gains through positive feedback loops. 25Q3 saw a historically significant incremental game, while 26H1 featured extreme divergence under a stock-game. Meanwhile, there were more offensive funds and fewer allocation-type funds. Public track-focused funds in positive feedback loops were the marginal pricing funds, and within public funds there was also a stock game, with capital flowing out of non-technology tracks and concentrating into high-velocity technology track-focused funds. In the decline wave, the weakening of the computing power inflation logic objectively existed; in terms of capital flows, all types of funds broadly reduced positions under encirclement. Allocation-type funds and absolute-return funds reducing positions constituted the marginal funds, driving negative feedback loops in capital flows. Funds that could be forced to reduce positions near break-even lines (corporate annuities, fixed income plus, bank wealth management, etc.) triggered concentrated position reductions in October 2026, while other categories of funds (margin financing, private funds, active public funds, etc.) simultaneously reduced positions. After broad deleveraging across all types of funds, combined with the intensification of policies to stabilize the capital market, the conditions for restoring short- to medium-term supply-demand balance of funds have improved. However, from a long-term perspective, the proportion of funds that have achieved clearing of high-tech positions is still not high. Margin financing and private funds have reduced positions relatively sufficiently; comprehensive position rebalancing by public track-focused funds typically waits until a new offensive structure emerges; corporate annuities and fixed income plus have marginally reduced technology positions but remain at historical highs; allocation-type funds hold high technology positions, which need to be resolved through multiple aspects in the long term. The intensification of policies to stabilize the capital market, combined with waiting for new industry catalysts to narrow floating losses, necessary position rebalancing, and adjustments to policy institutions and accounting treatment, may be what is needed to achieve long-term clearing.

Second, the current overseas asset allocation environment is facing headwinds, but the turning point may come from Warsh's monetary policy framework reform, and the overseas asset allocation environment has opportunities for improvement in 2027. Domestic A-share corporate earnings in 26Q4-27Q1 will be under pressure reflecting cost pricing impacts, with a rebound in 27Q2 as earnings return to normal levels, but elasticity will be limited. Domestic government transition is advancing rapidly, with policy execution strengthening at a faster pace. External demand is high early and low later, while domestic demand is expected to be low early and high later. The domestic asset allocation environment in 2027 may be generally stable. The current overseas asset allocation environment faces headwinds. Global resource protection sentiment is rising, with inflation stemming more from the supply side. In global economic governance, fighting inflation, fiscal discipline consolidation, addressing economic structural problems, and maintaining reasonable economic growth cannot all be achieved simultaneously and can only be balanced. Major global central banks prioritizing rate hikes to fight inflation may suppress capital markets. Potential improvement in 2027: Warsh's five major topics prepare for monetary policy framework reform. The implementation of special research on economic data, inflation frameworks, and AI's impact on productivity and employment will anchor monetary policy more closely to the characteristics of the era, easing expectations of rate hikes to fight inflation. Additionally, a Democratic sweep could bring geopolitical and supply-side forces to fight inflation, and subsequent bipartisan competition between Democrats and Republicans could also be a source of improvement. Domestically, based on earnings forecasts for all A-share non-financial companies, discussing the fundamental outlook, high costs being priced in during 26Q3-27Q1 may suppress profit growth. Starting from 27Q2, profit growth will return to normal levels, but elasticity will be limited. The forecast for 2027 year-on-year growth in net profit attributable to parent companies for all A-share non-financial companies is 6.4% (9.3% in 2026), with quarterly year-on-year figures for 26Q4-27Q4 being 3.5%, 0.4%, 4.6%, 12.0%, and 32.2% respectively (due to base effects). Maintaining strategic stalemate, domestic economic governance prioritizes stability. The pressure of the economic cycle objectively exists, and marginal policy efforts in 2027 are a natural expectation. Meanwhile, domestic government transition is advancing rapidly, with policy execution strengthening at a faster pace. External demand is high early and low later, while domestic demand is expected to be low early and high later. The domestic asset allocation environment in 2027 may be generally stable.

Third, AI is "not wrong," but computing power inflation may be "wrong." In the long-term outlook for the AI industry, there is no general computing power inflation. There are opportunities in the stage dominated by computing power inflation and also opportunities in the long-term stage dominated by computing power deflation, but the transitional period in between is a headwind period for capital markets. The AI industry is spontaneously correcting computing power inflation: on the demand side, a Democratic sweep, power shortages, and high financing costs have strengthened expectations that capital expenditures by cloud computing leaders will decline year by year during 2026-28. On the supply side, rapid increases in capital expenditures generally occur between 26-27, with the peak of capacity formation likely appearing in 27-28, and a timetable for supply-demand rebalancing has emerged. Correspondingly, market confidence in the 2028 computing power chain earnings has loosened somewhat. In the short to medium term, the probability of positive and negative factors for AI large models and applications is neutral, while negative factors for the computing power chain outweigh positive ones. In the long term, positive factors for AI large models and applications outweigh negative ones, while the computing power chain may return to neutral. The probability that the major band advance will be rebuilt based on the computing power inflation logic has significantly decreased. Over a longer time horizon, waiting for breakthroughs in AI large models and applications to construct the "second-stage advance." Next, the report discusses long-, medium-, and short-term band positioning, and uses this to deduce long-, medium-, and short-term market views.

Fourth, revisiting the "two-stage major band advance": in structural markets dominated by industry trends, a market featuring resonance between earnings and valuations may have two stages, corresponding to two valuation peaks and two institutional allocation peaks. Before mid-2026, computing power chain valuations and allocations basically rose unilaterally, which may only be the valuation and allocation peak of the "first-stage advance." The "correction phase between the two stages of advance" is typically at a quarterly-to-annual level, and the 26H2 correction has not yet broken through historical patterns. Is there still a "second-stage advance"? Or is it a new major-level market loosely related to the market before mid-2026? This question can be translated into: can the AI industry trend still serve as the main line for the next advance? In the view of Shenwan Hongyuan Group Co.,Ltd. (000166), the judgment that the AI application side still has room to open new tracks is objective, and the trend that the AI industry continues to advance is also objective; the space for household asset allocation migrating toward equities has not yet been effectively utilized. The next major band advance will most likely still be dominated by the AI industry trend. Therefore, the "second-stage advance" is worth anticipating. The duration of the "correction phase between the two stages of advance" may span multiple quarters, but will not last for years. In this phase, the upper limit from historical experience is 2014, and the lower limit is 2018. The 26H2 correction magnitude is closer to 2018, when macro shocks ultimately affected the fundamental trends of core assets (after June 2018, mid-level data for food and beverages weakened). In 26H2, both macro and industry factors are disrupted, with the result being a major band correction in main-line industry assets. The experience worth referencing from 2014 is that before the "second-stage advance" is established, there will be a phase where index gains are limited but themes are active. Before August 2014, the internet (from media leading to computers leading), mergers and acquisitions (companies in textiles, commerce, social services, real estate and other industries concentrating on transforming toward the internet), and reform (free trade zones, state-owned enterprise reform, Belt and Road, regional themes) all staged active theme-driven markets. In this process, consensus strengthened, positions concentrated, and the wealth effect fermented.

Fifth, there is already a timetable for long-term cost-effectiveness clearing. Computing power chain fundamental expectations are being revised downward, and valuation declines and cost-effectiveness improvements are matching this rapidly. From a reverse DCF perspective, across various segments of the computing power chain, the matching of long-, medium-, and short-term logic with valuation models is approaching a neat alignment. This is a characteristic of approaching a medium-term low. Only a larger-level fundamental downward revision, extending the major band correction, would require all remaining optimistic expectations to be revised down, which remains a low-probability scenario. If the "second-stage advance construction" is expected to complete in 2027, the market can fully unfold on the basis of neat alignment between logic and valuation. Currently, there is a timetable for the computing power chain to return to a long-term high cost-effectiveness zone. For communication sector static PE valuations, before the 26Q3 earnings report, they were at the historical median; after the 26Q3 earnings report disclosure, they fell below the median; after the annual report disclosure, they will be in a historically extremely low valuation zone. From a reverse DCF perspective, for leading companies in optical modules, storage, PCB, and gas turbines, current pricing has basically no implied expectations for additional growth in 29-30. For directions relying on self-controllability and entry into the industry chain logic, such as optical communication upstream, semiconductors, PCB upstream materials, and capacitors, pricing still includes relatively high growth expectations for 29-30. These directions have upward fundamental expectations (2027 earnings growth higher than 2026), which is the prerequisite for investment opportunities. Currently, across various segments of the computing power chain, the matching of long-, medium-, and short-term logic with valuation models is approaching neat alignment, which is a characteristic of approaching a medium-term bottom. In this situation, only a larger-level fundamental shock that pushes the correction magnitude beyond the "two-stage advance market framework" would require all remaining optimistic expectations in sub-sectors to be revised down. This is only a low-probability scenario. If the "second-stage advance construction" is expected to complete in 2027, the market can fully unfold on the basis of neat alignment between logic and valuation.

Sixth, long-, medium-, and short-term band positioning: in the long term, A-shares are in a correction phase between the two stages of advance at a magnitude comparable to 2018. In the medium term, the absolute-defense-dominated unilateral correction is already in its latter phase, and what may follow is a volatile phase with active bottom-level themes, which is a necessary process for constructing the "second-stage advance." In the short term, oversold rebound momentum is accumulating, the supply-demand balance of funds is being rebuilt, and a spring rally in 2027 around the turn of the year can be expected, with an earlier oversold rebound also being reasonable. Core conclusions for market trend judgment: Before March-April 2027, there may be a window for oversold rebound performance, and A-shares overall will no longer make new lows. After March-April 2027, this round of market correction may reach the bottom area, followed by increased structural opportunities and active themes, with new consensus possibly coalescing during this process. 27H2 anticipates the construction of the "second-stage advance." In 2027, there may be a clear major turning point from resonant headwinds in asset allocation environment, industry trends, and supply-demand of funds, to resonant tailwinds with clear distinctions. Correspondingly, investment opportunities in the second half of 2027 may be better than the first half, and investment returns in 2027 may be higher than in 2026.

Seventh, in 2027, emphasis should be placed on thematic investment: fundamentally, overall highlights will be fewer than in 2026, and the computing power chain industry trend will still face disruptions. In terms of capital flows, track-focused funds and allocation-type funds will find it difficult to form a joint force on technology leaders, and the relative strength of trading-oriented funds will regain dominance. Before the industry trend market is rebuilt, seeking breakthroughs from style investment, with small-cap stocks outperforming and active thematic markets possibly more sustained. Finding new industry consensus from thematic clues is also a necessary process for constructing the "second-stage advance." Future directions with high attention on the AI application side, from AI-ization of personal office work to corporate collaboration, and AI-ization of cross-company and cross-industry linkages, are directions with relatively high visibility for future earnings and cash flow improvement. At the same time, healthcare AI, embodied intelligence, and AI security are directions with relatively high industry and primary market attention among long-term AI application directions, and are also directions with smooth thematic logic. Among non-technology directions, cyclical assets with superior supply-demand patterns can still be traded around the intensity of geopolitical disruptions. During phases of intensifying geopolitical conflicts, the oil chain and shipping outperform; during phases of geopolitical easing and fermenting optimistic expectations for pro-cyclical sectors, industrial metals and basic chemicals outperform. Meanwhile, with Warsh's monetary policy framework reform and the impact of a Democratic sweep, the overseas asset allocation environment easing, gold can outperform in more medium-term scenarios. For domestic demand trading, the market has full awareness of the necessity of policy efforts, but it is difficult to form consensus on specific policy levers. The combination of domestic demand trading with high-quality factors and high-dividend factors (public high-quality investment, allocation-type funds, stabilizing capital market forces as marginal pricing) may effectively capture excess returns. High dividends and technology track investment are only a "seesaw effect." Currently, all types of funds participate in high-dividend assets to some degree, and the combination of high dividends with late-line targets, high quality, and low valuation/low gains is contributing excess returns. In headwind market phases, high dividends outperform; in active thematic phases, high dividends fade; in the construction of the "second-stage advance," high dividends may undergo a trend correction.