The recent minor correction phase has reached a stage where overall profitability and the relative outperformance of growth versus value have declined to moderately high historical levels. Short-term valuations are no longer extremely unattractive, and the phase of rapid decline has likely passed. A rebound could occur at any time, although a process of confirming the lower boundary of the trading range may follow.
Quantitative sentiment indicators suggest that both overall market profitability and the relative profitability of growth stocks compared to value stocks have retreated to moderately elevated levels compared to history. Issues such as high unrealized gains, excessive trading, and crowded trades have also eased in the short term. While valuations are no longer extremely poor, the improvement in attractiveness remains insufficient. The swiftest part of the decline is likely over, but the inherent momentum for a rebound remains limited. At this stage, a meaningful rebound requires new catalysts or emerging highlights to unlock further upside potential.
A rebound in U.S. stocks could lead to a rebound in A-share technology sectors, but a subsequent process of confirming the lower support level of the trading range is still anticipated.
The medium-term outlook remains unchanged: the positive market performance at the beginning of 2026 represents an extension and expansion of the structural bull market seen in 2025. The market is still in the high range of the first phase of the rally. Once the static valuations of leading sectors reach historically high levels, the momentum for pricing in distant fundamental improvements weakens, making a medium-term consolidation phase consistent with historical patterns. The start of the second phase of the rally awaits further progress in industry trends and an improvement in valuation attractiveness. Once the lower bound of the consolidation range is confirmed, a window for positioning based on medium-term opportunities will open, likely offering a more measured allocation period.
The medium-term view maintains the "two-phase rally" thesis. The initial phase, driven by anticipation of future prosperity and valuation expansion, has likely reached a high point. A second phase of gains is expected after medium-term industry trends strengthen and cyclical improvements are confirmed. It is important to note that the leading sectors and style characteristics tend to remain consistent across both phases.
After the near-term lower bound of the range is established, preparations for the second-phase rally can begin, opening a window for strategic medium-term positioning. This process is likely to start gradually, allowing for deliberate allocation. Looking ahead through the spring, the overall market is expected to be range-bound. Potential rebound waves within this consolidation may occur around the Chinese New Year in February, during the "Two Sessions" in March, and around key observation periods for U.S.-China relations in April.
Based on medium-term opportunities, four high-conviction views are discussed: 1. Venture capital and private equity fundraising have bottomed and are recovering, with new technological directions continuously emerging, suggesting a potential trend. 2. The AI industry trend still has clear room for growth, awaiting non-linear performance improvements from application layers. Progress in AI applications continues to be validated. 3. Short-term cyclical Alpha logic has been prominently featured, but disagreement regarding cyclical Beta remains. Domestic and international cyclical improvements represent a significant area of potential expectation mismatch. Future cyclical improvements could serve as a sufficient condition for launching the second-phase rally. 4. The impact of potential U.S. policy shifts (a U.S. version of shifting from virtual to real economy, or U.S.-style credit easing): While capital market excess liquidity may decrease, the probability of fundamental cyclical improvement increases. Subsequently, expectations for improved external demand may gain more traction.
Within the consolidation phase, the best opportunities lie in new technological directions, awaiting new catalysts. Following the confirmation of the range's lower bound, attention should be paid to rebound opportunities in the AI industry chain around the Lunar New Year. Additionally, with pressure from broad-based ETF redemptions easing, non-bank financials are also poised for a rebound. Finally, for medium-term positioning, prosperous technology sectors and cyclical Alpha remain key focuses. Promising technology sectors include overseas computing power chains, AI applications (where the real opportunity may lie in Hong Kong-listed internet stocks), semiconductors, robotics, commercial aerospace, and energy storage. Cyclical Alpha focuses include non-ferrous metals and basic chemicals. An extension of medium-term cyclical Alpha investment could be the export/overseas expansion chain. Furthermore, medium-term re-rating opportunities in non-bank financials are favored. For short-term rebounds around the New Year, sectors with higher elasticity are also those with solid medium-term prospects.
Risk warnings include a deeper-than-expected overseas economic recession and a slower-than-anticipated domestic economic recovery.