On the eve of "April 2," Goldman Sachs and Morgan Stanley's China strategy teams are both bullish

Recently, major Wall Street firms Goldman Sachs and Morgan Stanley have voiced their bullish outlook on the Chinese market. Goldman Sachs predicts that the Chinese stock market is likely to see more fundamental-driven gains, while Morgan Stanley has once again raised the target levels for several major Chinese stock indices.

On March 26, Goldman Sachs analyst Kinger Lau stated in a recent report that investors are responding calmly to the threat of U.S. tariffs, while the narrative around China's AI is seen as a game changer, expected to boost China's earnings per share by 2.5% annually over the next decade and attract over $200 billion in funds.

On March 25, Morgan Stanley analysts Laura Wang and others raised the target levels for several major Chinese stock indices, including the Hang Seng Index, MSCI China, and CSI 300 Index, forecasting an 8%-9% upside potential by the end of the year. According to previous reports from Wall Street, Morgan Stanley has once again raised the target levels for Chinese stock indices, based on three solid reasons: the first earnings surprise in three and a half years, upward revisions in profit forecasts, and the potential for valuations to eliminate long-term discounts.

Goldman Sachs: China's AI narrative will be a true "game changer"

Goldman Sachs' research results show that the vast majority of investors have regarded the development of artificial intelligence in China as a true "game changer."

Analysts expect that the widespread application of AI technology will contribute approximately 2.5% growth to the earnings expectations of Chinese companies annually over the next decade.

This technological revolution is not only expected to enhance corporate profitability but also to attract over $200 billion in portfolio funds into the Chinese market, providing sustained financial momentum for the stock market.

Additionally, Goldman Sachs stated in its latest report that investor surveys indicate a calm approach to tariff concerns. There may be three key reasons behind this:

First, due to the reduction in China's direct exports to the U.S. and the continuous improvement in product competitiveness, the sensitivity of the Chinese economy to U.S. tariff impacts has decreased.

Second, under the threat of tariffs, the overall stability of the RMB exchange rate has further enhanced market confidence.

Finally, investors are betting that both China and the U.S. may reach a comprehensive agreement in the coming months, ultimately leading to tariff reductions rather than continued escalation.

Moreover, Goldman Sachs pointed out that global fund managers generally have the willingness to return to the Chinese market, which will provide additional upward momentum for the Chinese stock market.

Morgan Stanley: Three solid positives for the Chinese market

Despite the ongoing uncertainties, Morgan Stanley holds a cautiously optimistic view on the prospects for the Chinese market, believing that with improved profit expectations and valuation recovery, the market is likely to achieve further gains.

1. According to Morgan Stanley's analysis, the MSCI China Index constituents have shown their first quarterly earnings surprise in three and a half years.

The fourth-quarter financial reports indicate an 8% net earnings surprise based on both the number of companies and market capitalization, marking the first time since the third quarter of 2021 and ending a 13-quarter streak of disappointing earnings.

Among major global markets, China ranks second in the world with an 8% net earnings surprise rate, only behind Japan's 13.7%, significantly outperforming Europe, the U.S., and other emerging markets. More importantly, this performance improvement is well-distributed, rather than concentrated in a few large-cap companies, indicating a healthier recovery2. Morgan Stanley has raised its earnings growth forecasts for MSCI China in 2025 and 2026 to 7% and 9%, respectively, up from the previous 6% and 9%.

3. Morgan Stanley expects that the valuation of MSCI China will align with that of MSCI Emerging Markets, eliminating the long-standing discount. Currently, the 12-month forward PE of MSCI China has risen from 10.2 times to 11.6 times, and the discount to MSCI Emerging Markets has narrowed to 6%