An analysis of the market outlook from ten major institutions suggests the A-share market may experience a period of consolidation and adjustment between June and July, requiring a phase of accumulation before a potential breakout. Investors should monitor three key points regarding market rotation.
Macro Analysis: Strong Non-Farm Payrolls Data Fuels Rate Hike Expectations
The May 2026 U.S. non-farm payrolls report showed a significant addition of 172,000 jobs, substantially exceeding market expectations of 88,000. The leisure and hospitality sector was a primary driver of private-sector job growth for the month. Employment in the government sector also saw a notable rebound, reversing its prior declining trend. Even excluding the consistently strong performers like leisure/hospitality and education/healthcare, the three-month moving average of new jobs in other private industries has shown a sustained recovery trend since late 2025. Only the financial and information sectors did not exhibit significant improvement. This indicates the U.S. labor market remains broadly solid, with the scope of job growth expanding.
The unemployment rate edged down slightly from 4.33% in April to 4.29% in May, aligning with market forecasts. The labor force participation rate held steady at 61.8%, showing no rebound. The decline in the unemployment rate was primarily driven by decreases in temporary layoffs and re-entrants to the workforce. Employment conditions for marginal groups improved, while average weekly hours and hourly wage growth met market expectations.
The persistently stronger-than-expected jobs data further signals stabilization and recovery in the U.S. labor market, catalyzing market expectations for potential interest rate hikes and triggering significant asset price adjustments. This has led to a stronger U.S. dollar, a sharp rise in Treasury yields, a substantial decline in U.S. stocks, and weaker gold prices. The view is that internal disagreements within the Federal Reserve remain significant, making a rate hike within the year unlikely. However, markets may face temporary liquidity shocks in June, potentially leading to at least one to two months of heightened volatility for U.S. equities.
Strategic Outlook: A Transformative Bull Market Unfolding
The foundational conditions for a sustained, gradual, and transformation-driven bull market in China's capital markets are gradually falling into place. In the past, factors like lowered growth expectations, heightened geopolitical tensions, and asset price depreciation elevated the risk premium and discount rate applied to Chinese assets, reflecting a lack of confidence. Since 2025, market perceptions have begun to shift. The resilience demonstrated by China amid U.S.-China tensions and the U.S.-Iran conflict has led to a renewed appreciation of the country's governance capabilities and industrial cluster advantages. The construction of a "breakwater" for the capital markets has also helped end expectations of a vicious cycle of asset price depreciation, systematically lowering the risk assessment and discount rate for Chinese assets. Consequently, the capital markets are now better positioned to pool social capital and consensus, creating the conditions for a long-term, steady, and transformative bull market in Chinese stocks alongside a potential appreciation of the Renminbi. However, the characteristics of industrial transformation and a K-shaped economy have also raised the cognitive threshold for recognizing this current bull market.
Market Outlook: Stability as the Foundation, Transformation Driving the Bull
The assessment is that stability will form the base, with transformation driving a sustained bull market. After brief periods of "showers," the Chinese market is expected to reach new highs. The shift in China's growth engine is not easily perceptible in daily life. Global AI capital expenditure, including in the U.S. and China, has not slowed and is accelerating. Chinese manufacturing is deepening its global integration, with the engineer dividend and economies of scale enabling Chinese products to expand from "cost competition" to "value competition." Traditional industries, after years of decline, are also becoming less of a marginal drag. The full-year growth forecast for A-shares has been revised upward to 10.6%, with the "transformation bull" theme heavily coloring profit growth expectations.
Secondly, the waning of traditional business growth models and the breaking of financial rigid payments have simultaneously reduced the opportunity cost of investing in stocks and lowered the risk-free rate, indicating that market absorption capacity and the sustainability of long positions are far stronger than before. Furthermore, the U.S. policy stance aimed at prioritizing lower financing costs, or the acceleration of foreign exchange settlement by Chinese enterprises, creates expectations for improved financial conditions that are positive for the medium-term market trajectory. Finally, capital market reforms initiated with the "National Nine Articles" continue to gain traction, enhancing the investability of Chinese assets and reducing market volatility, playing a crucial role in shifting past perceptions of a market overly focused on financing.
Therefore, even if U.S.-Iran tensions resurface or domestic trading-side disturbances occur, the impact of summer "showers" is unlikely to be prolonged. Chinese equities are expected to deliver solid performance in the second and third quarters, potentially reaching new highs, while a more stable approach may be warranted in the fourth quarter.
Sector Allocation and Thematic Strategy: Emerging Tech as the Core, Value Also Has Its Day
Investors are advised to continue focusing on opportunities in growth-oriented companies and traditional firms undergoing transformation in the third quarter. The conditions for a full style rotation are not yet in place, with emerging technology remaining the core theme. Within this theme, new economy sectors offer high growth potential, while manufacturing favors global leaders. 1) Emerging Technology: Continued U.S. and Chinese AI investment, capacity shortages, and accelerating technological iteration, with no signs of a peak in inventory-to-sales ratios or return on invested capital (ROIC), and core leading company valuations not stretched, suggest room for further tech sector gains. Recommendations include: communication equipment, high-end equipment, integrated circuits, and minor metals. 2) Advantaged Manufacturing: Chinese companies are rapidly globalizing. AI investment and the energy transition are providing new historical growth opportunities for leading companies with competitive advantages, leading to improved ROE and expanded corporate boundaries. Recommendations include: power equipment and new energy, engineering machinery, automobiles and parts, and innovative drugs. Additionally, if navigation through the Strait of Hormuz improves, some traditional sectors that were on a path to recovery but saw their repair interrupted by cost pressures could experience valuation recovery, broadening the market. 3) Traditional Sector Recovery: Building materials, chemicals, non-ferrous metals, coal, as well as aviation, hotels, and consumer staples. Furthermore, sectors like banks and securities, where micro-structures have cleared and valuation advantages are prominent, are also viewed favorably. It is also suggested to increase allocations to stable, high-dividend stocks around the autumn-winter transition in the fourth quarter. Recommended investment themes include: indigenous innovation/self-reliance, AI infrastructure, robotics, commercial aerospace, Xinjiang revitalization, and urban renewal.