According to the research team led by Lin Rongxiong at Essence Securities, sectors such as semiconductors, communication equipment, consumer electronics, and batteries are still in a phase of "double-hit upward momentum," characterized by accelerating profit growth and rising net margins, with no fundamental sell signals yet on the horizon. The convergence of technology and going global is reshaping A-share earnings patterns, and the real concern is not the peak of industry momentum, but when the second derivative of profit turns negative or net margins become overextended. Momentum is the starting point for a rally, but it is not the entire story.

The latest research from the Essence Securities strategy team reveals that A-share fundamentals continue to improve. In the first half of 2026, the profit growth rate for the entire A-share market excluding financials and non-financials is projected to return to double-digit growth for the first time since 2021, with technology and overseas expansion spearheading a new profit cycle. However, whether this momentum translates into market performance and how high the rally can climb will depend on a systematic framework for pricing industry momentum. Strategists Lin Rongxiong and Peng Jingtao have pioneered a "three-factor pricing model" that examines the difference between capital expenditure and profit growth rates, the second derivative of profit, and net margin. This framework aims to answer the core questions of buy signals, sell signals, and the potential extent of the rally, showing that semiconductors, communication equipment, consumer electronics, gaming, and batteries are all currently in the "double-hit upward" stage. AI hardware and overseas expansion are at the core, meaning fundamental sell signals are still distant and the signal to hold positions heavily during the main upward phase is clear. From a macro perspective, excluding financials, the combined profit share of technology and overseas expansion is approaching 50%. Referencing A-share "30%-60%" profit cycle rules, where upstream cyclical stocks broke through 50% in 2005 and consumer and real estate sectors did so in 2016, leading to new upward profit cycles, this cycle's protagonists are likely to be technology and overseas expansion, heralding a fresh profit cycle for A-shares.

Breaking Down the Three-Factor Pricing Framework: How Momentum Translates into Rally

Essence Securities decomposes momentum into three trackable core indicators that complete a closed loop of the capacity-profit cycle. The first indicator is the difference between capital expenditure and profit growth rates, which sets the buy signal. Essentially, it captures the pace difference between supply expansion and earnings realization, leading profit turning points by two to four quarters. When capital expenditure growth consistently outpaces profit growth, it indicates aggressive capacity expansion, pointing to supply release pressure over the next one to two years. Conversely, when capital expenditure growth stays below or turns negative while profits are still recovering, it signals capacity clearing, which is often fertile ground for the next momentum upswing. In practice, a negative and narrowing difference confirms a buy signal for supply clearing, whereas a significantly positive and widening difference is a top warning.

The second indicator is the second derivative of profit, which determines the sell signal. This indicator captures whether profit growth is accelerating or decelerating and directly drives valuation expansion or contraction. A positive second derivative is the earliest financial confirmation of a turning point in momentum; a negative one is the first alarm of a momentum peak, typically leading the peak in net margin by one to two quarters and the stock price peak by about one quarter. Accelerating profits support holding during the main upward phase, while a retreat from a peak with still-high absolute growth rates constitutes a sell signal. The third indicator is the net margin, which sets the extent of the rally. Net margin is the most intuitive but easily misread metric, reflecting the accumulated result of industry pricing power and supply-demand dynamics. New highs in net margin imply valuation overextension and limited upside; a recovery from the bottom suggests a Davis double-play and expanding potential. Historically, market peaks often occur in a "dual-high" stage where the second derivative has peaked and is declining but growth remains elevated, and net margins are at historically high levels. These three indicators are not isolated but form a closed loop: high margins attract capital expenditure, widening the difference, leading to increased future supply, pressuring margins, turning the second derivative negative, prompting companies to cut capital expenditure, narrowing the difference, clearing supply, recovering margins, and turning the second derivative positive again.

Eight Momentum States: A Complete Path from Cleansing to a Double-Dip

By exhausting the combinations of increases and decreases in the three factors, eight momentum states emerge, evolving along a six-stage path of "cleansing, recovery, reversal, prosperity, peak, and main decline." The four contraction group states unfold sequentially: bottoming with a purge (capital expenditure shrinking, profits decelerating, margins falling, waiting for dawn); quality-leading on the right side of the bottom (capital expenditure shrinking, profits decelerating, margins recovering, with margin recovery leading and indicating staged left-side entry); repair initiation with volume substituting for price (capital expenditure shrinking, profits accelerating, margins falling, where volume leads price, reducing rebound elasticity); and the starting point of a double-hit upward (capital expenditure shrinking, profits accelerating, margins rising, with dual improvements in earnings quality and slope, signaling heavy position buying). The four expansion group states follow: prosperity peak (capital expenditure expanding, profits accelerating, margins at new highs, with volume and price rising together, euphoria nearing a top, signaling staged profit-taking); revenue growth without profit gains, a price war (capital expenditure expanding, profits accelerating, margins falling, favoring only cost-leading players); peak growth (capital expenditure expanding, profits decelerating, margins still high, with M-top risk, sending a clear sell signal); and a double-kill main decline (inertial capital expenditure expansion, profits decelerating, margins falling, a signal to firmly avoid or liquidate).

Historical Case Validation: Buy and Sell Signals Repeatedly Confirmed

Essence Securities has validated the effectiveness of this framework with eight industry case studies. The electronics sector (AI hardware) serves as a typical example of a contraction group buy signal: in 2024, shrinking capital expenditure alongside a profit turnaround confirmed a buy signal, and in 2025, the second derivative of profit continued to accelerate, with stock prices up about 265% from the 2024 low. Currently still in the profit release phase with rising margins, the double-hit logic has not yet fully played out. The power equipment sector (new energy) validated the expansion group's "dual sell signal" pattern: a growth peak in 2021 corresponded to a trading peak, and a growth peak in 2022 corresponded to a fundamental top, creating an M-top with dual sell signals. After purification in 2024, profits turned positive, and in 2025, the convergence of capital expenditure and profit growth differences again confirmed a buy signal, with stock prices rebounding a cumulative 111%. The communication equipment sector is the closest sample to the current situation: since 2024, net profit growth has been steadily rising (Q2 2026 single-quarter +83%) alongside capital expenditure contraction, forming a fresh buy signal, with AI computing power driving cumulative stock gains of +732%. With net margins now at historically high levels, the core sell signal to track is whether the second derivative of profit peaks and declines. The liquor industry provides a contrasting case: net profit growth peaked in 2021 and trended down, turning negative in 2025, without ever showing a buy signal combination. Stock prices have been in a long-term decline to -40% since the second top in Q2 2021 (cumulative +82%), validating the judgment to avoid the sector. Photovoltaic equipment is a typical example of "expansion overextension": after high growth in 2022, the industry entered an expansion race, and in 2023, the capital expenditure difference widened significantly, a warning of oversupply. From 2024 to 2025, deepest losses reached -194%, and stock prices fell 42% from their highs. The sector remains mired in fundamental difficulties, and intervention is unwise before market clearing is complete.

Current A-Share Momentum Map: Double-Hit Upward Trend Is the Main Market Line

Based on the three-factor pricing model and a survey of A-share sub-sectors, Essence Securities divides the current market into three tiers. The bottoming-and-purge group is dominated by real estate chains and some midstream sectors: photovoltaic equipment losses widened to -13.6 billion yuan in H1 2026 (with a single-quarter loss of 7.6 billion yuan in Q2), purging is incomplete; real estate development losses narrowed by 17% but sales have not recovered; the liquor sector's Q2 single-quarter decline expanded to -21%; and aquaculture turned from profit to loss. Before confirming earnings turning points, it is advisable to remain on the sidelines awaiting signals. The repair-and-climb group is concentrated in cyclical sectors and pharmaceuticals with adequate supply clearing: coal mining turned positive to +28.9% in H1 2026, with a Q2 single-quarter gain of +68%, confirming a right-side earnings recovery; oil refining, chemical fibers, and chemical raw materials saw Q2 single-quarter gains accelerate to +76%, +151%, and +100%, respectively; after supply clearing in medical devices, 2026E net profit is +55%, with innovative drug BD overseas expansion, all issuing clear staged entry signals in the repair zone. The double-hit upward group is precisely the main market line today: semiconductor net profit growth rose from +167% in Q1 2026 to +236% in H1 2026, with a striking +279% single-quarter gain in Q2, and net margins rebounded significantly to 19.1% (an 11.8 percentage point improvement from H1 2025); communication equipment saw Q2 single-quarter growth of +101%, and biological products showed the strongest reversal at +141%; AI hardware and overseas expansion are the key intersection, confirming the clear signal to hold positions heavily during the main upward phase. The report specifically notes that current readings are structurally identical to the start of electronics in 2024 and communication equipment in 2025, a stark contrast to the "dual-high" sell signals seen in new energy in 2021 and coal in 2022, meaning fundamental sell signals are still far off. The key to positioning is not to guess the top but to track when the second derivative of profit peaks and declines, and whether net margins reach overextended highs.

A New Profit Cycle: Technology and Going Global Reshape A-Share Earnings Structure

From a macro structural perspective, the A-share earnings landscape is undergoing deep reshaping. In H1 2026, profit growth for the entire market and the market excluding financials came in at 16.82% and 16.22%, respectively, a clear rise from Q1 2026 (7.27% and 12.32%), marking the first return to double-digit growth for the full market ex-financials since 2021. Structurally, about 25% of A-share revenue and 30% of profits now come from overseas contributions, and excluding financials, the combined profit share of technology and overseas expansion approaches 50%. Referencing the A-share "30%-60%" earnings rule, where upstream cyclical stocks triggered the "five golden flowers" rally in 2005 and consumer and real estate sectors triggered the "Nifty Fifty" rally in 2016, the current near-critical point for technology and overseas expansion signals a new upward profit cycle is unfolding. The K-shaped economic trend persists: capital expenditure in TMT and high-end manufacturing is rising sharply, in stark contrast to old-economy sectors like construction, building materials, steel, and food and beverage. This divergence manifests in financial reports, with revenue and net profit growth in TMT and high-end manufacturing continuing to improve while the old economy remains in a downturn. For overseas expansion, the Flush Overseas 50 Index posted H1 2026 revenue growth of +20.53% and net profit growth of +29.99%, significantly outperforming the broader market, with ROE reaching 18.63%, approaching 20% and far above the A-share average, demonstrating superior earnings quality and momentum. At the index level, H1 2026 profit growth ranks as follows: ChiNext 50 (+202.97%) > ChiNext (+52.21%) > CSI 500 (+31.99%) > CSI 300 (+21.34%) > CSI 1000 (+14.20%). The ChiNext's ROE of 15.44% ranks highest, making it the best representative index for tech hardware and upstream overseas expansion momentum. Essence Securities concludes that momentum sets the direction, the three factors set the timing, and the direction lies in technology and overseas expansion. These two forces are completing the reshaping of A-share earnings, driving the conversion of China's macroeconomic engines, and fostering a cohort of new core assets with industrial transformation and global competitiveness within A-shares.

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