The current A-share market is undergoing an adjustment at a level that casts doubt on the continuation of a bull market. The AI industry chain exhibits characteristics of "an ongoing major wave of industrial trends + minor fluctuations in smaller waves + temporarily insufficient cost-performance ratio," which is similar to the adjustment patterns seen in the Growth Enterprise Market in 2014, the food and beverage sector in 2018, and the new energy sector in 2021. Based on the framework of the 'two-phase bull market theory,' this round of adjustment is building momentum for Phase 2.0 of the bull market, expected to commence in the second half of 2026. At that time, there will be a convergence of improved fundamentals, a new phase of industrial trends, and shifts in household asset allocation. Both pro-cyclical and technology sectors are likely to see rebound opportunities during the spring rally.
First, the adjustment reflects 'skepticism about the bull market level': The AI industry chain is characterized by 'major industrial trends still ongoing + minor fluctuations in intermediate phases + temporarily insufficient cost-effectiveness in major phases,' similar to the ChiNext in early 2014, consumer goods in early 2018, and new energy in early 2021. In this context, a 'high-level consolidation' or 'adjustment phase' lasting for quarters aligns with historical patterns.
The adjustment merely reflects 'skepticism about the bull market level': The 'two-phase bull market theory' is a defining characteristic of A-share bull market cycles. After the adjustment, patiently await cyclical improvements in fundamentals + a new phase in technological industrial trends + a shift in household asset allocation toward equities + resonance from China's rising influence, which will usher in the comprehensive bull market of Phase 2.0.
The judgment based on the 'two-phase bull market theory' remains unchanged. The high-level region forecast for Bull Market Phase 1.0 has been validated. This theory is a hallmark feature of A-share bull market cycles: Bull Market Phase 1.0 (2013, 2017, and potentially 2025) involves institutional investors completing style shifts + a qualitative change in profit accumulation (net asset values of mutual funds issued during the previous peak return above water) + insufficient cost-effectiveness of trend-driven assets. The transition period from Bull Market Phase 1.0 to 2.0 (February-October 2014, 2018, and possibly the first half of 2026) involves waiting for conditions for a full-scale bull market to accumulate + bottoming out after industrial trend adjustments to resolve cost-effectiveness issues. Bull Market Phase 2.0, the comprehensive bull market (2015, 2021, and potentially the second half of 2026), centers on cyclical improvements in fundamentals/new phases in industrial trends + a shift in household asset allocation toward equities.
An adjustment reflecting 'skepticism about the bull market level' is currently underway, but this phase calls for even stronger conviction in the bull market. Once the adjustment reaches its target (near the boundary between bullish and bearish trends in core sectors), it will mark a significant bottom, paving the way for 'Bull Market Phase 2.0.'
Second, after the adjustment, the spring rally becomes more promising: Achieving the goal of becoming a moderately developed country by 2035 requires maintaining a relatively high economic growth rate. With the economy showing weakness in Q3 2025, positioning for 2026's economic outlook at year-end may lead to an earlier-than-expected validation of the 'policy bottom.' Short-term cost-effectiveness in technology growth stocks is rapidly improving, with institutional investors reducing their tech exposure, thereby improving microstructure. Technology growth will also be a key component of sector rotation during the spring rally.
After the adjustment, the spring rally becomes more promising. We explore two potential drivers of the spring rally:
1. Policymakers' emphasis on economic growth may lead to an earlier-than-expected validation of the 'policy bottom.' Achieving the goal of becoming a moderately developed country by 2035 necessitates maintaining a relatively high economic growth rate. Given the weak economic performance in Q3 2025, December 2025 represents a critical window for laying out policies for 2026, potentially validating the 'policy bottom' ahead of schedule.
2. The mid-term upward trend in the technology sector remains intact. The AI industry trend is still in 'Phase 3,' transitioning deeper into 'Phase 3' and progressing toward 'Phase 4,' with non-linear growth in industrial profitability. Domestic technological advancement continues steadily. The linkage between primary and secondary markets is rebounding (primary market venture capital financing typically bottoms and rebounds during A-share structural bull years like 2013, 2019, and 2025). From a cost-effectiveness perspective, short-term attractiveness in technology growth has improved significantly, with institutional investors reducing their tech holdings and alleviating microstructural pressures. Both cyclical plays and technology may present rebound opportunities in the spring.
Third, outlook for sector rotation in 2026: During the transition from Bull Market Phase 1.0 to 2.0, high-dividend defensive strategies may outperform. In Bull Market Phase 2.0, tangible improvements in economic sentiment (actual improvements) will catalyze cyclical leadership driving index breakthroughs. Ultimately, the main themes of the bull market will revolve around technological industrial trends and the global influence of manufacturing.
Spring 2026: Early validation of policy bottom + cyclical price increases + expected YoY improvement in PPI, pro-cyclical assets may form the basis for the spring rally. Cyclical alpha in basic chemicals and industrial technology remains a direction with higher elasticity. The rebound in technology will focus on sectors that have cleared valuations first, particularly innovative pharmaceuticals and defense. AI computing power, memory, energy storage, robotics, and other sectors will also present rebound opportunities in the spring.
Main Body:
First, the adjustment reflects 'doubts about the bull market level': the AI industry chain exhibits 'long-term trends continuing + short-term fluctuations + temporarily insufficient cost-performance,' resembling the ChiNext in early 2014, food and beverage in early 2018, and new energy in early 2021. In such cases, quarterly-level 'high-level consolidation' and 'adjustment phases' are consistent with historical patterns.
The adjustment merely reflects 'doubts about the bull market level.' The 'two-phase theory of the bull market' is a typical feature of A-share bull cycles. After the adjustment, patiently await the cyclical recovery in fundamentals, a new phase in the technology industry trend, households reallocating assets toward equities, and China's rising global influence to collectively drive the transition to Bull Market 2.0, a full-scale bull market.
Background and scale of the adjustment: Temporarily insufficient cost-performance in the AI industry chain requires correction to restore balance. The market’s expectation of an immediate bull market has been rapidly revised downward. Based on historical experience, the adjustment represents 'doubts about the bull market level.'
Currently, the implied ERP (Equity Risk Premium) of communication, electronics, and STAR 50 Index remains far from historical lows, but PE ratios are already at absolute historical highs. The AI industry chain still shows 'long-term trends continuing + short-term fluctuations + prolonged low cost-performance,' similar to the ChiNext in early 2014, food and beverage in early 2018, and new energy in early 2021. These three periods did not mark the end of long-term trends but instead saw 'bull-market-level doubts leading to adjustments.'
Two key historical lessons are highlighted:
1. High-level consolidation phase: Earning returns from valuation expansion becomes more challenging. Even with incremental industry catalysts or sustained high earnings growth, upward breakthroughs are difficult, and rebounds are more likely within a high-level consolidation range. Market sensitivity to liquidity shocks increases. High-level consolidation phases typically last for quarters.
Since September, the AI industry chain has been in a high-level consolidation phase. In the short term, the probability of a Fed rate cut in December remains low, and lower-than-expected easing triggered widespread declines in high-value global assets (global tech stocks, gold, Bitcoin), reflecting insufficient asset cost-performance, increased vulnerability, and heightened sensitivity to liquidity shocks.
2. Adjustment phase: Typically triggered by clear industry disruptions (e.g., QR code payments halted in 2014 due to security concerns for the ChiNext; economic slowdown impacting food and beverage in 2018, with pressure on baijiu fundamentals; chip shortages in electric vehicles and surging polysilicon prices suppressing mid-to-downstream demand in 2021). These disruptions ultimately proved not to signal the end of industry trends but instead sparked 'bull-market-level doubt-driven adjustments.' Adjustment phases are typically quarter-level, with corrections nearing the bull-bear boundary considered reasonable.
The 'Two-Phase Bull Market Theory' remains unchanged. The assessment of the high-level region in Phase 1.0 of the bull market has been validated. This theory is a typical characteristic of the A-share bull market cycle: Phase 1.0 (2013, 2017, and 2025), where institutional investors have largely completed their style shift + the cumulative effect of profitability creates a qualitative change (net asset value of public funds issued during the previous peak returns above the waterline) + insufficient cost-performance of industry-trend assets. The transition period from Phase 1.0 to 2.0 (February-October 2014, 2018, and possibly the first half of 2026 this time), awaits accumulation of conditions for a full-scale bull market + bottoming out after adjustment of industry trends to address cost-performance issues. Phase 2.0, the comprehensive bull market (2015, 2021, and possibly the second half of 2026 this time), centers on cyclical improvement in fundamentals/new phase of industry trends + migration of household asset allocation towards equities.
An adjustment reflecting 'skepticism about the bull market level' is currently underway, but this phase calls for even stronger conviction in the bull market. Once the adjustment reaches its target (near the boundary between bullish and bearish trends in core sectors), it will mark a significant bottom, paving the way for 'Bull Market Phase 2.0.'
Second, after the adjustment, the spring rally becomes more promising: Achieving the goal of becoming a moderately developed country by 2035 requires maintaining a relatively high economic growth rate. With the economy showing weakness in Q3 2025, positioning for 2026's economic outlook at year-end may lead to an earlier-than-expected validation of the 'policy bottom.' Short-term cost-effectiveness in technology growth stocks is rapidly improving, with institutional investors reducing their tech exposure, thereby improving microstructure. Technology growth will also be a key component of sector rotation during the spring rally.
After the adjustment, the spring rally becomes more promising. We explore two potential drivers of the spring rally:
1. Policymakers' emphasis on economic growth may lead to an earlier-than-expected validation of the 'policy bottom.' Achieving the goal of becoming a moderately developed country by 2035 necessitates maintaining a relatively high economic growth rate. Given the weak economic performance in Q3 2025, December 2025 represents a critical window for laying out policies for 2026, potentially validating the 'policy bottom' ahead of schedule.
2. The medium-term upward trend in the technology sector remains intact. The AI industry trend is still in 'Phase 3.'
As we delve deeper into 'Phase 3' and transition towards 'Phase 4,' industrial profits are experiencing non-linear growth. Domestic technology industry trends are also making steady progress.
A recovery in the linkage between primary and secondary markets is being validated (a rebound in venture capital financing amounts typically occurs during structural bull years in A-shares such as 2013, 2019, and 2025). From a cost-performance perspective, short-term attractiveness of technology growth has improved rapidly, institutional investors have reduced their technology exposure, and microstructural pressures have eased. Both pro-cyclical sectors and technology may present rebound opportunities in the spring.
Third, outlook for sector rotation in 2026: During the transition from Bull Market Phase 1.0 to 2.0, high-dividend defensive strategies may outperform. In Bull Market Phase 2.0, tangible improvements in economic sentiment (actual improvements) will catalyze cyclical leadership driving index breakthroughs. Ultimately, the main themes of the bull market will revolve around technological industrial trends and the global influence of manufacturing.
Spring 2026: Early validation of policy bottom + cyclical price increases + expected YoY improvement in PPI, pro-cyclical assets may form the basis for the spring rally. Cyclical alpha in basic chemicals and industrial technology remains a direction with higher elasticity. The rebound in technology will focus on sectors that have cleared valuations first, particularly innovative pharmaceuticals and defense. AI computing power, memory, energy storage, robotics, and other sectors will also present rebound opportunities in the spring.
Source: Shenwan Hongyuan
