A calm reflection on the narrative of "East Rising and West Falling"! Shenwan: 2026 may be the first window for supply clearing in the history of the A-share midstream manufacturing industry

I. Short-term policy narrative tends to be optimistic, and the market is once again heading towards a perfect spring rally

The enthusiasm of local governments has been fully enhanced, responding to policies that stimulate consumption and incentivize private enterprises, with financial support for fertility incentive policies from both central and local governments. The "East rises, West falls" narrative has a grassroots foundation, and foreign capital is actively participating in pricing for consumption stimulation, reinforcing optimistic expectations. Credit was relatively weak in January-February, and the market anticipates a reserve requirement ratio cut, interest rate reduction, and a restart of liquidity easing.

The short-term policy narrative is becoming optimistic, with multiple optimistic expectations overlapping, undervalued cyclical stocks experiencing a rebound, and the profit-making effect continuing to spread widely. The performance of the A-share spring market has once again moved towards the paradigm of a perfect spring rally. The short-term fermenting optimistic expectations include:

1. The enthusiasm of local governments has been fully enhanced, accelerating the implementation of policies to stimulate consumption and incentivize private enterprises. Among them, fertility incentive policies are blooming across various regions, with potential financial support from both central and local governments.

2. The macro narrative of "East rises, West falls" has a solid grassroots foundation. We understand that the "East rises" and "West falls" reflected in stock prices have their respective sources. The "East rises" is due to breakthroughs in the technology industry that build consensus and enhance risk appetite, based on structural opportunities, similar to this week's pulse-like fermentation of comprehensive optimistic expectations. The trigger for the "West falls" is the faster-than-expected progress of Trump’s tariffs, leading to the fermentation of global recession trades. In the short term, foreign capital's active participation in domestic consumption-stimulating stock pricing has reinforced the market's optimistic expectations for foreign capital inflow.

3. In January-February, the issuance of local bonds increased significantly, supporting high growth in social financing, but the year-on-year increase in medium- and long-term credit for residents and enterprises was limited, dragging down overall credit growth, confirming that real demand remains relatively weak. This also leads the market to expect that the window for a reserve requirement ratio cut and interest rate reduction is approaching, with the liquidity tightening window since the beginning of the year potentially shifting towards easing in the short term. This is more reflected as optimistic expectations in the stock market in the short term.

II. Our economic outlook: Export growth is naturally expected to decline in Q2 2025, and the threat of U.S. tariffs on China may significantly amplify economic expectation fluctuations

The fermentation of pro-cyclical optimistic expectations still faces resistance. We believe that the endogenous improvement of the economy requires supply clearance as a prerequisite, with 2026 being a key window. This spring rally still faces the test of the "April decision," and the verification period requires maintaining a degree of clarity.

The trend of the technology industry since the Spring Festival has temporarily prevented the market from viewing changes in demand, especially external demand, as the main contradiction, and it remains in the spring rally window in the short term. Our subsequent economic outlook remains unchanged: In Q2 2025, China's exports are under pressure for growth decline, with the fermentation of overseas recession expectations + the decline in support for import demand from the U.S. inventory cycle. If this phase is compounded by an escalation of U.S. tariffs on China, macro expectations may experience significant fluctuations. Some advanced technology theme investments may also adjust under macro expectation disturbances. This round of "economic bottom" confirmation indicates that demand-side stimulation needs to resonate with supply-side clearing, and 2026 may be the first window for supply clearing in the history of the A-share midstream manufacturing industry. At that time, a series of macro narratives may improve, the market's demand for stable growth policies will decrease, the impact of tariff threats on profits will weaken, and the conditions for optimizing China's external circulation will improve.

The cyclical clues that have fermented this spring will still face the test of the "April decision." The nature of the short-term market is still focused on investors who "cut high and buy low," using event catalysts to create a value recovery market, with value sectors experiencing rotation and rebound, but the sustainability of a single industry may be limited. The direction of short-term market rotation remains unchanged, and a period of verification is coming, so it is important to maintain a level of clarity.

III. Cyclical expectation recovery, consumption is the short-term positive clue overlay direction (stimulating consumption, fertility incentives, foreign capital preferences)

We maintain the judgment that the mid-term technology industry trend is dominant, and the window for mid-level adjustments in technology has not yet arrived. We continue to recommend investment opportunities in domestic AI computing power and applications, embodied intelligence, and low-altitude economy. In the short term, cyclical expectation recovery, consumption is the direction of short-term positive clues overlay, including stimulating consumption, fertility incentives, and foreign capital returning to core A-share assets.

The judgment that the mid-term technology industry trend is dominant remains unchanged. We have considered the possible triggering factors for mid-term adjustments in technology:

1. Severe fluctuations in the macro environment, with macro volatility amplifying in Q2 2025, will also lead to adjustments in advanced thematic investments.

2. The performance verification of domestic AI computing power is still in its infancy and is not a source of adjustment. As for the application side, the current narrative is that blockbuster applications have not yet emerged, but the market believes there will be blockbuster applications. During this expectation-driven period, technology is also unlikely to undergo significant adjustments. However, subsequent applications may be constrained by the foundational large models, which still have room for development and improvement, and may not achieve the effect of fully replacing traditional methods from the outset.

In this case, a correction similar to that of the U.S. stock market from July to October 2023 may occur (at that time, market concerns were about slow AI application, premature computing power investment, and Nvidia's excessively high profits). The window for mid-level adjustments in technology has not yet arrived, and we continue to recommend investment opportunities in domestic AI computing power and applications, humanoid robots, and low-altitude economy. The judgment that Hong Kong stocks in the internet sector are the leaders in this round of AI market remains unchanged.

Article authors: Fu Jingtao, Wang Sheng, et al., Source: Shenwan Hongyuan, Original title: "A Calm Reflection on Cyclical Trends" Risk Warning and Disclaimer

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