Shenwan Hongyuan's Fu Jingtao: The fourth quarter market will be better than the third quarter, and the index center will further rise in 2026

On September 5th, the significant rise in A-shares cleared the "gloom" of the previous trading days, bringing smiles to many investors.

However, whether the market trend will continue to rise or stagger gradually still raises concerns among investors.

In this regard, Fu Jingtiao, Chief Analyst of A-share Strategy at Shenwan Hongyuan, recently shared his analysis and outlook on the subsequent market under the title "Time is a friend of the comprehensive bull market."

He stated that A-shares are not afraid of periodic adjustments, nor are they afraid of a slowdown in the pace of the bull market. As time goes by, the future should be an increasingly better process, the next wave of market will be better, the index's space will be larger, and the central point may be further elevated.

What is his investment logic? What is his outlook on the market trend? We provide a transcript (in the first person, with minor edits).

Fu Jingtiao's key points:

1. Recently, in every communication setting, I have clearly stated that I am here to talk about the bull market.

2. A-shares will get better as time goes on; the fourth quarter of 2025 will be better than the third quarter, and the index central point in 2026 may further step up.

3. At this position, we are not afraid of the market undergoing periodic adjustments, nor are we afraid of a slowdown in the pace of the bull market. As time goes by, the future will be a state where the bull market trend is increasingly easy to ferment.

4. The optimistic expectations for the bull market and national fortune are already in everyone's mind, but for the stock market, there is still one link missing; the sectors on the main axis of the real bull market narrative still need to wait for catalysts.

5. People often say this stage is a "water buffalo" market, but we believe that historically, no bull market has been completely unsupported by fundamentals.

6. As time goes by, the sectors with improving fundamentals will continue to increase, especially in advanced manufacturing and industries related to Chinese manufacturing. This direction may become a core fundamental factor for the potential bull market in the future.

7. Next year is expected to usher in an upward turning point in profitability on a five-year dimension. Behind this is an improvement in the supply-demand structure, along with an increase in turnover and profitability, a situation that has not occurred for five years.

8. The current market trend should be a stage of momentum performance driven by high-tech prosperity. However, the depth of this bull market will not stop here; Chinese enterprises deeply involved in the global industrial chain and those in the domestic technology chain may gain more pricing power in the future.

9. In this round of market, apart from valuation boosts and incremental capital inflows, a more solid fundamental support comes from the fields in the stage of industrial trends and track directions, where leading companies are likely to be in the Hong Kong stock market.

A-shares will get better as time goes on

Recently, in every communication setting, I have clearly stated that I am here to talk about the bull market.

In the previous phase of continuous acceleration in the market, we told everyone that a better bull market was still ahead, but at that time, it may not have been the most optimistic view of the market.

However, after the recent market experienced a short-term adjustment and some rest and pause, discussing the depth of the bull market and the space for subsequent market fermentation at this time point is a very good and appropriate time window One of our core views is that the (A-share) market will get better as time goes on. The fourth quarter of 2025 will be better than the third quarter, and at the same time, investment opportunities in the A-share market in 2026 may further step up the index center.

We discuss the depth of the bull market, and the core view is that time is now a friend of the comprehensive bull market. An important clue behind this statement is that over time, on one hand, the clues for fundamental improvement will continue to increase; on the other hand, the conditions for incremental capital inflow and the relocation of household deposits will continue to improve.

When we generally discuss stocks, we talk about win rates, odds, fundamentals, valuations, and supply-demand of funds. As time goes on, the win rate will continue to improve, and the odds will also correspondingly improve.

Therefore, we are not afraid of periodic adjustments or a slowdown in the pace of the bull market. Because as time goes on, the future should be a process that becomes better and better, or in other words, a process where the bull market trend becomes easier to ferment.

Three Necessary Conditions for a Bull Market

We summarize that every round of a bull market has three necessary conditions.

The first necessary condition is an optimistic expectation at the national level. After the parade on September 3rd, the underlying confidence in people's minds regarding the future development of the Chinese economy and the overall enhancement of China's global influence has improved, which may become an important mainline clue in the future bull market process.

We call the narrative of this round of optimistic expectations the "Chinese Strategic Opportunity Period," which refers to the process of the Chinese system going global. This includes several directions such as economy, politics, military, culture, and finance being exported outward.

What is the goal of this export? Our understanding is to transform the competitive advantages that Chinese manufacturing has already achieved and will continue to maintain in the future into higher profitability and greater industrial discourse power that matches the competitive advantages.

Currently, there is an optimistic expectation at the national level for the bull market in everyone's mind. However, the mapping to stocks is missing a link; the sectors that are truly on the main axis of the bull market or the core narrative axis still need to wait for catalysts to form a long-term trend resonance.

For example, anti-involution, advanced manufacturing, and directions with pricing power and industry dominance domestically, the overall improvement in profitability and prosperity may ultimately ferment into a bull market-level characteristic or have the characteristics of a long-term grand narrative with high elasticity.

Incremental Capital Will Continue to Enter the Market

The second condition for a bull market, which is also an essential condition for a bull market, is the continuous inflow of incremental capital into A-shares.

Incremental capital mainly discusses two structures. First, the participation of retail investors in the A-share market is indispensable during a bull market. Second, the allocation of equities by retail investors is inseparable from the marginal increment of public funds.

Historically, in a bull market, public funds may not be the main marginal pricing capital, but there will definitely be a cycle of incremental gaming by public funds, along with changes in their weight The first structural aspect is that we have developed an indicator called the degree of residents' deposit migration. This indicator is still in the bottom area after three years of deep adjustment in 2022, 2023, and 2024. The so-called influx of residents has quickly reached a stage of low cost-effectiveness, which must be a short-term and small wave phenomenon. The core feature and state of a large wave is that residents' deposits are at an extremely low level relative to the market value of the stock market, and the influx has just begun. Therefore, the point we have reached is that the long-term supply and demand migration of funds is still in a low area.

Second, in the spring of this year, I also mentioned that a condition for the new issuance of public funds to increase is that the products from the previous issuance peak must be unblocked before the next issuance peak can occur. At that time, we discussed that the net value of products from the peak issuance period of 2020 to 2021 was still around 0.8. However, by the time of this round of adjustment, the highest net value level has already dropped to 0.97.

This means that if there is another round of structural market, even if it is just a small wave, the new issuance of public funds may gradually begin to drive upward significantly. Moreover, this initiation should start from fixed income to fixed income +, and possibly even more, as there may be a process of additional migration from fixed income + to the equity market in the future.

The process of migration, the positive cycle of industrial trends, and the positive cycle of incremental funds are actually in the time window ahead. Therefore, the current high prosperity, such as overseas computing power and innovative drugs, has already realized relatively high elasticity.

In the future, as time goes by, some directions suitable for public funds to invest in industrial trend investments may have higher investment opportunities and upward elasticity.

There has never been a bull market without fundamentals

The third necessary condition for a bull market is the cyclical or structural improvement of fundamentals.

People often say that this place is a water buffalo, a bull market driven by certain key structural positive cycles. We believe that historically, there has never been a bull market that was completely unsupported by fundamentals.

The verification of the total economy may be weak, but the fundamentals of the bull market will definitely have structural highlights, while the total economy is not bad and has a certain upward support, which is a necessary prerequisite for a bull market.

One of our core judgments this time is that as time goes by, the sectors with improving fundamentals will continue to increase, especially in advanced manufacturing and industries related to Chinese manufacturing. As the clues of prosperity improvement continue to increase and accumulate, they may become the core fundamentals of this potential bull market in the future and may also become a key source of incremental clues for the evolution of subsequent market trends.

Next year will welcome the first upward turning point in profits in five years

The core logic of this round of upward turning point in the supply-demand pattern and the upward lifting of A-share corporate profitability is that the supply side is originally in a clearing state, and the anti-involution has strengthened the visibility and sustainability of the improvement in the supply-demand pattern The current status of capital expenditure and construction in progress in the midstream manufacturing industry of listed companies is indicative of the early stage of investment. The characteristics it presents are that both capital expenditure and construction in progress have reached historical lows.

Especially in terms of construction in progress, the historical low was around 0, and this time it has dropped to -15%. Moreover, the overall negative growth rate in the second quarter report and the first quarter report has not narrowed and continues to be maintained.

Corresponding to the formation of fixed assets, the final capacity formation level is expected to fall to around 2-3 by mid-2026.

We compare this with three data points.

First, the historical low is 6-7 percentage points. If this time it reaches 2-3, it will be the historical lowest point for the supply growth rate in midstream manufacturing.

Second, compared to the current level, the latest second quarter report shows a supply growth rate of around 11 percentage points, which is expected to be only a small single-digit next year.

Third, compared to the nominal GDP readings, the normal forecast for next year's nominal GDP growth rate (which is the demand growth rate) will be higher than the supply growth rate. Therefore, there will be an improvement in the supply-demand pattern, coupled with an upward turnover rate and enhanced profitability. This situation has not occurred for 5 years, so next year is expected to be a turning point for profitability on a 5-year dimension.

Stock selection will be easier next year

From a micro perspective, what will investors feel when looking at the industry and researching listed companies?

At this stage, the supply growth rate is around 10, and there are not many new highlights on the demand side. Therefore, industries that have completed supply clearing, meaning that fixed asset growth is at a relatively low level, are also predicted to see a year-on-year decline in fixed asset growth through capital expenditure, indicating a bottoming out state.

In terms of subdivided industries, currently, on average, 1 out of 5 industries may show growth. This means that for those selecting stocks without particularly deep fundamental research capabilities, the probability of finding winning listed companies from the supply side perspective is about 1/5, which certainly feels insufficient.

However, by mid-2026, using this set of predictive indicators, we can fit the data, and by the third quarter of 2026, the vast majority of listed companies will have completed the clearing. At least 4 out of 5 industries will be in a state of supply clearing. At that time, based on the significantly declining supply growth rate, the optimistic expectations on the demand side will begin to ferment, creating favorable conditions. This is an endogenous improvement in the supply-demand pattern, and from this point onward, the direction of supply-demand improvement will be continuously increasing.

Another point is that there are now anti-involution policies, and one of the most certain aspects of anti-involution is that capital expenditure cannot be realized. The last round of supply-side reform saw negative growth in capital expenditure in upstream cyclical industries, which began around mid-2014 and continued until the end of 2017, with overall capital expenditure being in negative growth.

Therefore, one expected characteristic of this round of anti-involution is that around mid-2024, a cycle of negative growth in fixed capital expenditure in midstream manufacturing will begin, potentially lasting three years to form a rounded bottom. Corresponding to the growth rate of fixed asset formation, this will return to the bottom area by mid-2026, and this bottom area may persist until 2028

Overseas Demand Also Needs Attention

From the demand side perspective, I would like to highlight two viewpoints, both related to external demand.

First, it seems that everyone has defaulted to the idea that the Chinese economy will continue to weaken marginally, external demand will weaken, the U.S. economy is declining, and the European economy is lackluster.

However, in reality, we are entering a time window where China's fiscal policy will still have phase-based stimulus and will continue to exert efforts on the consumption side and service industry projects.

At the same time, both the U.S. and Europe have very certain and clear fiscal stimulus timelines, especially after the Federal Reserve completes its normal interest rate cuts. In the future, the U.S. policy mix should be a combination of loose monetary policy and expanded fiscal policy.

One potential impact of this combination is that the U.S. economy may not be bad in the first half of 2026, while the overall stability of external demand will be relatively strong. If external demand remains strong, the core factor supporting the Chinese economy from 2021 to now may not decline significantly.

Second, we have developed an indicator related to trade integration, and there is an interesting phenomenon: the trade integration between China and the U.S. actually has three downward turning points. The first turning point was around 2010, which marked the downward turning point of globalization. From 2010 to 2017, the trade integration between China and the U.S. generally maintained a high level. The first decline in trade integration began in 2017 and 2018.

The second time point is not the impact of the pandemic, but the period from 2021 to 2022. This is because our manufacturing industry is highly competitive, and the competitiveness of Chinese manufacturing has significantly increased compared to the U.S. and Europe, leading to a decline in trade integration between the two countries.

However, beyond this narrative, there is another influence: the trade integration between China and other countries is unilaterally rising. Therefore, if China's global influence continues to increase, especially its economic influence on developing countries significantly rises, the integration with other countries will improve. This is unrelated to the turning point of globalization or the impacts of Trump 1.0 and 2.0, nor does it relate to China's so-called internal competition and horizontal competition.

Thus, there is an expectation on the demand side that even if the integration between Europe and the U.S. and the Chinese economy declines, the economic influence of other countries will also marginally increase. Therefore, it cannot be said that the decline in export growth and trade relations between China and the U.S. means that other countries remain unchanged and are doing poorly; rather, other countries are continuously growing, which reflects the depth and resilience of the Chinese economy and may be a source of potential highlights and structural changes on the demand side in the future.

Systematic Improvement in Performance in 2026

We will translate the previous discussions on supply, demand, and fundamentals into profit forecasts and specific performance outlooks for listed companies. In the future, we will welcome the first occurrence in five years.

The first occurrence in five years is the overall profitability of A-shares (improving). In fact, there should be a noticeable upward trend around mid-2026 At the same time, 2026 may witness the first systematic double-digit positive growth in the overall performance of A-shares. This has not happened since 2021.

In this context, the fundamental outlook for 2026 includes key fundamental validations, along with more favorable economic directions for support.

The market will not only focus on high-tech prosperity

Let's discuss the prosperity structure of various sectors. The current market trend should be in the phase of momentum trading driven by high-tech prosperity. This includes the global computing power industry chain and innovative pharmaceuticals, both of which have clear prosperity clues, sufficient positive logic, and overall valuation cost-effectiveness still within an appropriate range.

However, the depth of this bull market, or the accumulation of momentum, will not stop here. This is because these sectors are typically represented by Chinese enterprises that are deeply involved in the global industry chain, which have experienced high growth in performance leading to some high-prosperity directions.

In addition to these industry chains, there are also some domestic technology chains, including directions where Chinese enterprises may have more pricing power, which currently have relatively weak performance and lack particularly clear prosperity signals.

As time goes by, their prosperity validations will gradually emerge, potentially aligning more closely with the logic of the bull market's main axis. The future upward elasticity and potential investment return space will have a higher validation. We need to assess the possibility that, over time, if we do not see prosperity validations in these directions.

How long might we need to wait?

Let me share two main historical market experiences.

The first is called supply-side reform policy, analogous to the current anti-involution trend, where the lag from policy layout to effect validation is about 1 to 3 quarters. If the supply-side logic is relatively easy to implement and the policy is achievable, it may be realized in one quarter.

The second historical experience to reference is that after the launch of technology industry trends, a new round of technology market typically emerges every 3 to 4 quarters, until it reaches an extreme position. Each newly emerged market trend usually lasts about 3 to 4 quarters. Therefore, starting from around mid-2010, there has been an average complete technology market fermentation every one and a half years.

For example, overseas computing power and AI are more like around mid-2013, while domestic AI may still be slightly before that time window in 2013, so there is still some space for market evolution.

As time goes by, the time needed to wait for the next stage of catalysis is also about 2 to 3 quarters, so by the second half of 2026, it is highly likely that we will see new technological catalysis, new cyclical improvements in fundamentals, and clues for supply-side catalysis to stimulate the next stage of the market.

Our core judgment is that the next wave of the market will be better, the index space will be larger, and the central axis may further rise.

High dividends and Hong Kong stocks are also worth paying attention to

Let's discuss two additional directions.

The first direction is high dividends. High dividends are difficult to achieve excess returns in a bull market, but the absolute return potential is still relatively large.

In this round of market evolution, the key reform clue is the improvement of corporate governance and shareholder returns. The key incremental funds are long-term funds entering the market, the accelerated development of passive public funds, and the rapid development of quantitative products related to private equity and public equity, which are in a window of high-speed progress. These marginal funds, combined with the fundamentals of key reform policies, have strong value attributes.

Therefore, when this bull market truly reaches its peak, we believe there will be a revaluation of indices, leading to index-level increases that will open up the entire upward space, and high dividends will still have a relatively large absolute return potential.

The second is the Hong Kong stock market, which everyone thought was great before, but now seems to have cooled expectations at this stage.

When the Hong Kong stock market was performing exceptionally well, it seemed that everyone misunderstood the core starting point of their investments. Looking back now, the Hong Kong stock market is a market where key industry trends and leading companies in specific sectors are relatively concentrated. In the phase where AI applications are dominant, there are leading internet companies in the Hong Kong stock market. In the phase where innovative drugs and new consumption are dominant, the absolute leaders and relatively leading companies are also in the Hong Kong stock market. When these sectors experience a fundamental pause or adjustment, the pricing of the Hong Kong stock market directly reflects this process.

Therefore, in this round of market conditions, besides valuation boosts and incremental capital inflows, a more solid fundamental aspect for the Hong Kong stock market is the accumulation of industry trends and sector directions, where leading companies are likely to be in the Hong Kong stock market. It is a core beneficiary market driven by the rapid development of institutional investors, promoting in-depth investments in prosperous sectors.

In this market, during the peak phase of the bull market, it is possible that the Hong Kong stock market will not underperform the A-share market, and may even outperform the A-share market in certain sector directions. Thus, we may still insist that the Hong Kong stock market could be a very important leading market in this round of bull market.

This leading characteristic is reminiscent of the ChiNext from 2013 to 2015, which ultimately may have higher elasticity, with a greater degree of revaluation and space opening for leading companies. At this stage, the A-share market has condensed more optimistic expectations for the bull market, while the Hong Kong stock market's response to fundamentals is relatively objective.

The current time window is also a time window worth increasing allocation to the Hong Kong stock market.

In conclusion, the current bull market is still in its early stages, but the early stage is approaching 4,000 points. Everyone can imagine the potential upward elasticity and space in the future.

To truly participate in the bull market, beyond the general asset allocation framework and risk diversification framework, being able to hold large positions and chips in the early stages of the bull market is actually a more suitable choice for ultimately preserving bull market returns, or a more fundamental suggestion.

Risk warning and disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk