A-shares "outperform" US stocks: the background and implications

In the current situation where some are "afraid of heights" in the US stock market, the A-share market is still trying to "break through itself." After outperforming GDP, since the second half of the year, the A-share market (Shanghai Composite Index) has also outperformed the former market "darling" US stocks (S&P 500). According to our standards (rolling 12-month cumulative returns), the relative excess return compared to the US has exceeded 15%, reaching a new high since 2015. Interestingly, under the current macro narrative, discussions about US stocks often revolve around "policy" and "risk," while keywords for A-shares are more about space and planning... The stock market has become the most direct and concentrated reflection of this year's "offensive and defensive situation between China and the US." So, how should we view the sustainability of this trend in the future, and what should we continue to pay attention to?

First, under what circumstances is it easier for A-shares to outperform US stocks? Overall, the stability of A-shares (Shanghai Composite Index, the same below) is slightly inferior to that of US stocks (S&P 500, the same below). Since the 1990s, A-shares have outperformed US stocks in about 41% of the months. Among these, the scenario where A-shares rise unilaterally (A-shares rise while the US falls) accounts for about 18.5%.

Under conditions where both A-shares and US stocks win, the probability of A-shares outperforming is greater. As shown in Figure 2, excluding the scenario of "A-shares falling while US stocks rise," the situation where A-shares and US stocks rise and fall together is "evenly matched," with A-shares having a winning probability of about 54% when both rise; in the case of both falling, this probability is only about 28%.

To better and more smoothly measure the historical performance of A-shares relative to US stocks, we use two dimensions of measurement: first, the cumulative "excess" return of the Shanghai Composite Index relative to the S&P 500 over the past 12 months; second, using a diffusion index to measure the situation where A-shares have "outperformed" US stocks over the past 12 months (greater than 0 indicates that the number of months A-shares outperformed in the past 12 months is more). We define the above stage where the excess return is greater than 0 and rising, and the diffusion index is in an upward state as the stage where A-shares "outperform" US stocks.

According to the above standards, since the early 1990s, there have been 10 typical stages where A-shares have outperformed US stocks (including this year, with a duration of no less than 3 months). Historically, excluding the early noisy periods of 1991 and 1994, on average, the duration of the 7 stages of "outperformance" is about 10 months, with the rolling 12-month cumulative "excess" return of the Shanghai Composite Index reaching a maximum of about 58%, during which the highest "excess" return corresponds to a rolling 12-month cumulative return of the Shanghai Composite Index of 60%

Secondly, what are the main factors affecting the fluctuations in the stock market? In terms of valuation and profit contribution, we break down the A-share returns into PE and EPS. From past experience, valuation changes have a relatively larger contribution to the rise and fall of A-shares, playing a dominant role.

This is consistent with what we mentioned earlier in "The Stock Market Outperforms GDP: Analytical Framework and Comparisons Between China and Abroad": Compared to foreign stock markets, valuation plays a more important role in the process of A-shares outperforming GDP.

By industry, first, in actively outperforming the market, an overall rise is a high-probability event. In addition, we ranked the performance of various industries within the outperforming intervals of A-shares since 2000 (using the Shenwan industry classification). Overall, industries such as machinery, finance, military industry, and computer technology tend to perform better. However, there are differences at specific stages; in 2000, 2006, and 2009, cyclical industries such as non-ferrous metals, coal, construction materials, and petroleum and petrochemicals performed exceptionally well due to economic improvements. In 2014 and 2022, the performance was more driven by liquidity, with the technology sector and small-cap stocks showing more significant gains.

Third, "Outperforming": How to start? How to end? Each round of A-share outperformance has different experiences, backgrounds, and triggering events. From the perspective of the economic cycle, A-share outperformance mainly occurs during the upward phase of the Chinese economic cycle. However, there are two questions here: First, does it mean that outperformance cannot occur during an economic downturn? Certainly not; as long as the U.S. is also in a period of economic slowdown or market bubble burst (the economic and market conditions during the U.S. tech bubble burst were quite special), A-shares still have the opportunity to outperform. Second, if the economic cycle turns during the outperformance phase, will the relative market end? Not necessarily; if the U.S. economy also "behaves" and goes down, the outperformance can still continue.

From a policy perspective, broad monetary easing may be more important. This includes both the easing of monetary policy itself and the strength of the dollar. Generally speaking, during the active outperformance phase, the dollar tends to be weak, leading to a global trend of broad liquidity easing; of course, if the Federal Reserve tightens and the dollar is strong, domestic counter-cyclical easing can also bring about a phase of outperformance, but this will subsequently put pressure on the RMB exchange rate and may lead to increased volatility in asset prices

The exceptions to passive outperformance often stem from the "troubles" within the United States itself. In 2022 and 2002, the outperformance of A-shares over U.S. stocks was largely due to the severe pullback in U.S. stocks, with the former primarily caused by the Federal Reserve's historically rare aggressive interest rate hikes; the latter was influenced by a series of events since the end of 2001, including the "Enron scandal," the Tyco International scandal, and the collapse of Arthur Andersen, which led to a significant retreat in market risk appetite, causing U.S. stocks to return to a downward trend.

The end of the outperformance may come from either a weakening of the A-share rally (potential reasons include the waning effects of domestic policies in China or tightening liquidity) or a rebound in U.S. stocks under a restored risk appetite, which would lead to a reduction in the excess returns of A-shares relative to U.S. stocks.

Finally, how will the future unfold? According to our standards, the current round of A-share outperformance over the U.S. began in June 2025, with the conversation between the Chinese and U.S. presidents elevating Sino-U.S. relations to a new stage. However, it is worth noting that at this time, our "outperformance diffusion index" remains negative; it was not until August that this index rose to 0 (over the past 12 months, A-shares only outperformed U.S. stocks for 6 months). This indicates that the outperformance of A-shares over the U.S. is largely reliant on individual months of significant A-share gains or substantial U.S. stock declines, and it also means that the A-share outperformance has reached a critical juncture: since 2015, apart from the passive market caused by the significant decline in U.S. stocks in 2022, the A-share "outperformance diffusion index" has not risen above 0. The upcoming September and fourth quarter are very important. If relative returns can be maintained, then based on historical patterns, this round of outperformance may last at least until the two sessions next year.

We tend to believe that the current rise in A-shares and the "outperformance" trend has not ended. On one hand, the Politburo meeting clearly stated the need to "enhance the attractiveness and inclusiveness of the domestic capital market," where relative returns and stability are crucial behind this attractiveness; additionally, there is still room for domestic policy, and after the past few years of "tempering," the higher-ups will be more adept at controlling the pace of policy; on the other hand, the contradictory policies of Trump, which demand both "more" and "less," have not found a convincing answer, leading the market to oscillate between "easing" and "inflation."

The continuation of outperformance may primarily occur in two scenarios: one is a joint cooling or adjustment, but with a larger adjustment in U.S. stocks; the other is a continued strong advance. Currently, the former scenario seems more likely. With the domestic military parade in September and the Federal Reserve's interest rate cuts finalized, under the demand for a "slow bull" market, the trend is likely to enter a consolidation phase. We tend to believe that the issues in the U.S. will arise after the interest rate cuts, and the tariffs in the fourth quarter will further exacerbate the transmission of inflation, which, from the current perspective, U.S. stocks are clearly more sensitive to Author of this article: Shao Xiang, Wu Shuo, Tao Chuan, Source: Chuan Yue Global Macro, Original Title: "A Shares 'Outperform' US Stocks: The Origins and Developments (Minsheng Macro Shao Xiang, Tao Chuan)"

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