CICC Strategy: What are the main contradictions in market pricing by 2026? The expectation for valuation expansion in A-shares is converging, with profit growth becoming the main contributor to returns this year.

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Source: XYSTRATEGY

**　　1. What are the main contradictions in market pricing for 2026?**

When do we sound the retreat-or-advance call on March 22? In our judgment, “the escalation in the intensity of short-term conflict is actually brewing the conditions for a downgrade on both sides toward the negotiation table; negotiations are what will set the subsequent benchmark path, and the call for a market counterattack often quietly sounds when sentiment is at its most pessimistic.” After the situation escalated at the beginning of this week, with Trump conducting the TACO twice and both sides formally entering the negotiation stage, the above view is now coming into verification.

Looking ahead, we maintain the view that “there may still be twists in the short term, while the medium term will achieve a downgrade through negotiations.” Therefore, regarding the market’s two core concerns at present—systemic risks caused by the conflict intensity continuing to spiral out of control and the risk of stagflation or even recession driven by high oil prices—these may not be the endgame of this round of conflict. Compared with worrying about the emergence of these two extreme pessimistic scenarios, what we need to think about is this: after this round of conflict, what variables prevent short-term certainty from returning to normal? We believe the key lies in changes to global liquidity expectations caused by the rise in the oil-price policy center, and the far-reaching impact it brings to the market’s pricing environment.

We emphasized in the 2026 annual strategy event where “all things compete,” “the biggest change from last year—this year’s core contradiction in A-share pricing is shifting from valuation-driven to earnings-driven.” Behind this, on one hand, is the historical experience that “A shares are unable to continuously expand valuation for three straight years.” On the other hand, is that the new upcycle in PPI supports the repair of corporate earnings. And since this year began, from a global perspective, a series of landmark events has triggered changes in the strength of the dollar and global liquidity expectations, further accelerating the market’s switch in pricing from valuation-driven to earnings-driven and certainty-driven.

On one hand, as the underlying logic of “a weak dollar”—which once dominated the expansion of global asset valuation multiples—faces challenges, market pricing factors have increasingly focused on certainty. In the past year, “a weak dollar” was the core variable driving the expansion of global asset valuations. This optimistic expectation continued to ferment in January of this year, and the valuation-expansion direction represented by high valuations, small-cap stocks, loss-making stocks, and high volatility continued to hold an advantage. But as late January’s nomination of Woshti triggered expectations of tighter liquidity, and the U.S.-Iran conflict erupted at the end of February, strengthening the petrodollar system, the underlying logic behind “a weak dollar” driving global asset valuation expansion was challenged, and market pricing also increasingly focused on more certain directions such as undervaluation, dividends, leading performers, and low volatility.

On the other hand, from a historical perspective, supply shocks often have a certain degree of persistence in their impact on the oil-price center—meaning the market this year needs to gradually adapt to changes in the allocation environment caused by the oil-price center rising. Looking back at six rounds of oil-supply shocks in history, except for 2022’s Russia-Ukraine conflict—which led to a global recession and a sharp weakening in demand due to the Fed’s aggressive rate hikes—after the other five conflicts, the oil-price center rose systematically compared with before the war, with magnitudes ranging from 10% to 3 times. Although the geopolitical risk premium will decline as the situation cools down, the real supply shock pushes up crude-oil transportation and insurance costs, and the slowly recovering production capacity makes it often difficult for the oil-price center to return to pre-war levels in the short term.

The systematic rise in the oil-price center after the conflict will affect global central banks’ monetary policy paths and liquidity expectations; this may mean that this year’s “valuation expansion” will be difficult to be as smooth as last year. This will become one of the most important changes in the allocation environment this year. In the past year, global assets shared a liquidity-loose β, driven by synchronized rate cuts among major global central banks. But since this year began, especially after the shock from high oil prices, the policy tone of central banks across countries has clearly shifted toward a more cautious and wait-and-see stance. It can be expected that, as the oil-price center rises systematically, central banks will still need more data and more time to validate its impact on the economy and inflation; the marginally tighter liquidity environment arising from this may make this year’s “valuation expansion” difficult to be as smooth as last year, and it will become one of the most important changes in the allocation environment this year.

As things stand, even if none of the above deductions has occurred yet, they are already concretely shaping market expectations. Based on our survey results from March 23 to March 25 of 260+ local core investment institutions—fund managers, research and investment (投研) staff in charge, and macro research analysts—market expectations for this year’s expected return distribution for A shares, as well as the distribution of earnings-growth expectations, are already converging. This means that most investors’ expectations for the space for A-share valuation expansion this year are narrowing, and earnings growth will become the main contribution to returns this year.

Therefore, for this year, it is not only the A-share bull market stage two shifting into an earnings-driven storyline, and the support that the new round of PPI upcycle provides for earnings repair, but also the change in global liquidity expectations caused by the rise in the oil-price center after this round of conflict—which will further accelerate the main contradiction in market pricing shifting from valuation expansion to an earnings-driven and certainty-driven switch. This is the logic change that we believe this round of conflict truly leaves behind for the market—one that the market will need to repeatedly strengthen its understanding of and place greater importance on over a long period of time.

**　　2. April: time will stand on the side of “cyclical certainty”**

For the allocation in April, the market has actually already chosen the “find victory amid chaos” direction for us in March. We summarized the top-performing sub-industries in A shares since the U.S.-Iran conflict and can be generalized into “three certainties”:

• Directions with strong earnings certainty and solid cyclical logic: represented by the North American computing power chain (communications equipment);

• After the oil-price center moves up, the energy replacement and price-transmission directions that benefit from certainty: the new energy industry chain (batteries, new energy vehicles, solar, wind power, power grids), coal, utilities (electricity, gas), agricultural products, etc.;

• Certainty-driven defensive risk-avoidance directions led by domestic demand and defense: banks, food & beverage, infrastructure construction, etc.

Looking ahead to April, as the market’s focus during the earnings season becomes even more concentrated on cyclical conditions, for the three “certainties” above, we believe time will stand on the side of “cyclical certainty.” Based on this, we have three structural projections for the future: 1) For cyclical tech and overseas-expansion chain stocks—after the discount caused by the concentrated pricing of geopolitical risk and tightening liquidity expectations in the early stage—because they have their own independent industry trends and fundamentals are themselves less affected by oil prices, during the earnings season they may instead be able to become the certainty direction that the market increasingly focuses on, and more high-quality segments may perform better; 2) For the price-hike chain—since the number of price-hike leads increases significantly in the first quarter, overall cyclical conditions may be validated by financial reports. This is a clue that should not be ignored in addition to tech growth, but internally it will most likely differentiate based on cyclical conditions, especially for products where oil acts as a cost-driven factor for price increases; 3) For parts of dividend and domestic-demand items that rely purely on risk-avoidance sentiment—if financial report season cannot validate cyclical conditions, their subsequent excess benefit is likely to gradually fall.

**　　3. Which sub-directions are worth paying attention to?**

First, the just-released January to February industrial enterprise earnings data are expected to provide clues for cyclical conditions for the first-quarter reports. The improvement in profit growth rates for industrial enterprises in January to February is clear: up from 0.6% at the end of last year to 15.2%, indicating that first-quarter performance overall may accelerate upward. At the industry level, we map industrial enterprises to Shenwan industries and track changes in cyclical conditions across manufacturing industries (profit growth rates). Based on the latest data from January to February, industries that are expected to see an acceleration in cyclical conditions in the first quarter mainly include TMT, nonferrous metals, chemicals, and non-metal materials (building materials, non-metal materials, etc.). In addition, first-quarter performance in coal, food manufacturing, paper, rubber and plastics, oil and natural gas, textile & apparel, electrical machinery, and other industries is also expected to improve at the margin.

In terms of sub-industries, by using the upward revisions to 2026 earnings forecasts since the start of the year, we select directions that are expected to perform better in the first-quarter reports, mainly concentrated in:

• AI: hardware (consumer electronics, communications equipment, components, computer equipment, communications equipment, electronic chemicals), software (games, IT services);

• Advanced manufacturing, overseas-expansion chains: new energy (batteries, solar power, wind power), defense industry (naval/navigation equipment), machinery (rail transit equipment, specialized equipment, construction machinery), commercial vehicles, medical services;

• Cyclical price-hike chains: nonferrous metals, coal, steel, chemicals (rubber), building materials (glass-fiber, glass-fiber products), shipping and ports, gas;

• Consumption & finance: agriculture, retail, accessories, securities firms, etc.;

Among the above sub-directions,结合 March’s performance in terms of upside and downside, we screen for high-quality industries that have been more impacted by external shocks in this round, mainly including: domestic computing power (semiconductors), components, AI mid-to-lower stream (games, consumer electronics, IT services), advanced manufacturing (defense industry, machinery, innovative drugs), cyclicals (nonferrous metals, chemicals, steel, glass-fiber products), service consumption & new consumption (retail, accessories, pet economy), etc.

Risk warning

Economic data volatility, monetary policy easing weaker than expected, the Fed’s rate cuts not meeting expectations, escalation of geopolitical situations, etc.

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