Guosen: The bull market is in its third stage, and a strong closing rally for A-shares in the fourth quarter is expected.

Guosen released a research report stating that in the third quarter, A-share market performance and sentiment remained persistently sluggish, and investors still have doubts about the current stage of the market and whether the bull market still exists. The firm believes that this A-share bull market is in its final stage, and there is still room for further market performance ahead. Looking ahead to the fourth quarter, under multiple positive factors at home and abroad, the A-share market is expected to usher in a repair window, and a strong closing rally is anticipated. Structurally, technology growth, which has relative advantages in fundamentals, remains the main line of the stock market. As the bull market enters its mid-to-late stage, the industry structure is also expected to gradually broaden. Investors can also pay attention to AI applications within technology, resource-based dividend assets, and real estate and consumption. Guosen's main views are as follows: 1. Market positioning: The bull market is in its third stage Third-quarter A-share market review: The market fluctuated and corrected, with industries and styles undergoing rebalancing. Looking back at the third quarter, the previously strong science and technology innovation sector adjusted significantly. The STAR 50 and ChiNext Index fell 30.7% and 27.8%, respectively (as of 9/30, cumulative third-quarter gain/loss, same below), underperforming CSI 1000 (-17.2%), CSI 300 (-12.5%), the Shanghai Composite Index (-6.2%), and SSE 50 (-5.6%). By stage, in July the science and technology innovation sector adjusted markedly, with the STAR 50 and ChiNext Index falling 25.9% and 23.0%, respectively; in August the market recovered somewhat, with CSI 1000 rising 9.8%, the Shanghai Composite Index rising 4.0%, and the STAR 50 and ChiNext Index rising 3.0% and 2.8%, respectively; in September the market declined again, with the STAR 50 and ChiNext Index falling 9.2% and 8.8%, respectively. Overall, large-cap blue chips were relatively resilient during this A-share adjustment, while the technology sector, which performed brilliantly in the first half, retreated significantly overall. Structurally, the leading sectors shifted from AI hardware to resource dividend sectors. In the third quarter, coal (19.3%), petroleum and petrochemicals (15.3%), agriculture, forestry, animal husbandry and fisheries (15.1%), and banking (14.6%) led gains, while electronics (-32.6%), communications (-28.7%), building materials (-26.1%), and power equipment (-23.7%) were among the biggest decliners. From the perspective of industry divergence, measured by the standard deviation of returns in SW Level 2 industries, A-share industry divergence fell from 28.8% at the end of June to 7.5% in early August, then rebounded to 13.6% at the end of September, still below the historical mean plus one standard deviation and significantly narrower than at the end of the second quarter. At the same time, the share of TMT turnover fell from 48.2% on July 10 to 40.1% at the end of September, indicating that the trading concentration in previously popular technology sectors has declined from a high level. Market position and sentiment: Trading heat has cooled, and valuation cost-effectiveness is still at the historical median. Trading sentiment has cooled from previous highs. As of September 30, the weekly annualized turnover rate for all A-shares was about 321%, down from about 373% the previous week, at roughly the 59th percentile from low to high since 2005. In terms of daily frequency trading, the current 5-day rolling average turnover for all A-shares is about RMB 1.6 trillion, about half the scale of the previous high of RMB 3.4 trillion in June, a new low in nearly a year. Both A-share turnover rate and trading volume have declined significantly, indicating that trading heat has converged. From the perspective of valuation cost-effectiveness, as of September 30, the PE (TTM) of all A-shares was about 21x, equal to the historical average of 21x since 2005, at roughly the 66th percentile from low to high since 2005; the risk premium was about 3.08%, higher than the historical average of 2.04% since 2005, at roughly the 30th percentile from high to low since 2005. Overall, A-share valuations and risk appetite have risen significantly from the 2024 low, but compared with history they are still only near the central position. Market cycle positioning: The bull market is in its third stage. Since the July adjustment, some investors' belief in the bull market has wavered. We believe the current bull market is not over, and the third-quarter fluctuations are a normal adjustment in the mid-to-late stage of a bull market. A bull market has its own cyclical rules and can be divided into three stages: the gestation period, the outbreak period, and the bubble period, with DRIVE respectively being policy stimulus, earnings improvement, and capital entry. Corresponding to this bull market, the policy stimulus of 9/24 in 2024 started the first stage of the bull market. The second stage of the bull market began in 25Q2, during which A-share net profit turned positive year over year, and earnings improvement gradually gained momentum. From the current point in time, corporate earnings growth continues to recover. In 2025, the year-over-year growth rate of A-share attributable net profit is only 2.0%, and excluding financials it is negative growth, while in the first half of 2026 it rebounds to 15.9% and 15.1%, respectively. At the same time, the breadth of fundamental improvement is also expanding. Measured by the share of SW Level 2 industries with year-over-year net profit growth exceeding 10%, the breadth of A-share profit improvement rose from 38% in 25Q4 to 46% in 26Q2. With earnings recovery combined with the ongoing process of household capital entering the market, the A-share bull market is in its third stage. We have consistently compared the market starting from 9/24 in 2024 to the 5/19 market in 1999. The broad background is that the economy is in a transition period of switching between old and new growth drivers. Comparing the pace of market operation, the current situation is similar to late February 2001. From the perspective of Elliott Wave Theory, it is currently at the low point of Wave 4 adjustment and the early stage of Wave 5 advance. 2. Fourth-quarter outlook: An A-share closing rally is anticipated As mentioned above, after the third-quarter fluctuations and pullback, we believe this bull market is not over and still has room for further performance. Looking ahead to the fourth quarter, under multiple positive factors at home and abroad, the A-share market is expected to usher in a repair window, and a closing rally is anticipated. From the domestic perspective, policy intensification will promote the diffusion and repair of fundamentals, and there is still room for insurance capital and household capital to enter the market. On fundamentals, the current macroeconomic performance is still acceptable. The September PMI reading came in at 50.1%, returning to expansion territory. At the same time, during the year, the micro-level earnings repair process of A-share companies continued. In 26Q2, ROE (TTM) for all A-shares rose for the first time since 2022. However, an important factor constraining further repair of macro and micro fundamentals remains the K-shaped divergence between the new and old economies. Looking ahead to the fourth quarter, domestic policy is expected to intensify further. On September 28, the State Council executive meeting emphasized the need to "increase the intensity of countercyclical adjustment of macro policy" and "roll out a batch of pragmatic and effective incremental policies." On September 29, the central bank and two other departments jointly issued a document, with the central government finance for the first time providing interest subsidies for commercial personal housing loans. We believe there is still room for additional demand-side policies in the fourth quarter, which are expected to support diffusion-style repair of macro and micro fundamentals. On the stock market liquidity front, the scale of active capital entering the market this year has been considerable. In the first half, bank-securities transfers and private funds inflow were about RMB 1.2 trillion and RMB 800 billion, respectively. In addition, allocation-type funds such as insurance capital and foreign capital were also major forces entering the market, but public fund inflows were bumpy. Looking ahead to the fourth quarter, incremental capital is still expected. On the one hand, this round of household capital entering the market may already be in the mid-to-late stage. From the perspective of indirect entry through public fund channels, there is still room for capital inflow, and if market risk appetite recovers in the future, related capital is expected to follow. On the other hand, benefiting from the growth in premium income of insurance companies this year, as well as new regulations requiring listed state-owned insurers to allocate 30% of annual new premiums to equity assets, and against the backdrop of declining domestic risk-free interest rates, insurance capital also has room to enter the market. From the overseas perspective, the global liquidity environment may no longer deteriorate later. Looking back at the third quarter, the external disturbances constraining the A-share repair rally stemmed from geopolitical conflicts and expectations of global liquidity tightening. On October 1, the 10-year U.S. Treasury yield briefly broke through 5.3%, a new high since 2002. However, recently signals of improvement in overseas liquidity have been increasing. On the one hand, U.S. nonfarm payrolls added 29,000 jobs in September, below the market expectation of 90,000, while the unemployment rate was 4.2%, also slightly above the market expectation of 4.1%. The probability of a rate hike has cooled significantly from before, and the current market expects nearly an 80% probability that the October FOMC meeting will not raise rates. On the other hand, on September 28, the U.S. and Iran began a new round of indirect negotiations. In addition, France recently proposed that EU and IEA member countries launch a new round of diesel and crude oil reserve releases. Since mid-September, WTI crude oil prices have fallen from a high of USD 106 per barrel to a recent low of USD 90 per barrel. Judging from the performance of overseas equity assets since October, the stock market's pricing of liquidity tightening is slowing at the margin. After the nonfarm payroll data was released on 10/2, the Nasdaq closed up 1.2%, reaching an intraday high of 27,353.7 points, a new all-time high. Looking ahead, considering that the U.S. midterm elections are gradually approaching and high energy prices create greater domestic political pressure, which may constrain the sustainability of the U.S.-Iran conflict, the U.S. side has a need to end the conflict as soon as possible. In addition, Iran will also reassess the costs and benefits of continued confrontation based on its own economic conditions, international diplomatic support, and other factors. Therefore, the possibility of the Middle East geopolitical conflict continuing in the medium to long term is relatively low, and we believe a window for it to end may be seen around the fourth quarter. In addition to the aforementioned macro factors, this bull market since 9/24 in 2024 is a technology bull market driven by the AI industry, so the fourth-quarter performance of the technology sector is a core variable affecting the A-share closing rally. We pointed out in several previous reports that this round of the technology market has M-shaped double-top characteristics, and the second wave is expected to begin around the fourth quarter. Recent positive signals indicate that the second wave of the technology market is about to emerge, which is expected to support the market's rise. Technology is expected to usher in the second upward wave of the M-shaped top, supporting the market's rise. Historically, the top of a high-prosperity industry often presents an M shape. In a round of pullback from the first top to the low, the average decline is about 40%, the average pullback duration is about 4 months, and the average decline in turnover share and turnover rate is nearly 40%. Subsequently, the second wave of the market truly starts only after expectations of policy tightening ease, or previous industry concerns are eliminated and new demand emerges to drive upward revisions in expectations. In addition, drawing on the experience of historically high-prosperity industries, the deeper the earlier decline, the more intense the second rebound after the low is usually. At the same time, when the market is in a high-risk-appetite environment, or when the industry sees new strong narrative catalysts, the secondary high of the industry can reach a relatively high level. From the current point in time, we believe the technology industry is in the pullback from the first peak to the low. Since mid-September, under the resonance of factors such as improvement in the global liquidity environment, clearing of sentiment and chips, and catalysts from new industry narratives, the conditions for the start of the second wave of the technology sector have gradually been met. The variables that need to be closely watched going forward are mainly the liquidity environment and verification of industry prosperity. Recently, the pressure of liquidity tightening has eased somewhat, and overseas technology companies have successively released new models, showing that positive signals for the technology sector are emerging around the holiday period. Overall, as this A-share bull market enters its third stage, combined with the resonance of positive factors at home and abroad, the second upward wave of technology is expected to drive the market to rise again. If the oil price center continues to move lower, Federal Reserve tightening expectations ease, and overseas cloud vendors' AI revenue growth continues to rise rapidly, the rebound space may be even more considerable. In the longer term, China's industrial upgrading continues to evolve, and the successful transition between old and new growth drivers is expected to occur during the "15th Five-Year Plan" period. This will bring a systematic increase in A-share ROE levels, and the overall repair of fundamentals will support the start of a more comprehensive bull market. 3. Industry allocation: Technology still has a second-wave opportunity The current policy environment remains accommodative, macro and micro fundamentals are gradually repairing, the trend of household capital entering the market is accelerating, and the A-share bull market is expected to gradually enter its third stage. Structurally, technology growth, which has relative advantages in fundamentals, remains the main line of the stock market. Moreover, as the bull market enters its mid-to-late stage, the industry structure is also expected to gradually broaden. Investors can also pay attention to AI applications within technology, resource-based dividend assets, and real estate and consumption. AI technology remains the main line of the industry, with attention to diffusion toward AI applications. The AI industry trend continues, the computing power chain remains prosperous, and the growth space for domestic substitution is further opened. Overseas, North American cloud vendors' capital expenditure continues to rise rapidly. In 26Q2, the capital expenditure of the four major CSPs increased 87% year over year, and the full-year 2026 capital expenditure guidance was raised to more than USD 730 billion. At the same time, Google, Amazon, and Microsoft's cloud business revenue growth reached 38.5% in 26Q2, further up from 33.6% in Q1, with demand growth providing support for continued investment. Recently, OpenAI, Anthropic, DeepSeek, and other vendors have successively released new models, with training demand and inference calls expanding together, which is expected to drive the prosperity of the computing power industry chain to continue upward. Domestically, domestic computing power substitution is accelerating. In September, Huawei released the Ascend 960 super node using NPO optical engines and an all-liquid-cooling design; Alibaba released its new-generation self-developed AI chip Zhenwu V900 at the September Yunqi Conference and announced that its self-developed AI super node would begin large-scale commercial launch in the current quarter. This shows that domestic independent computing power construction is steadily advancing from technological upgrading to large-scale application. After the earlier adjustment, trading heat in the A-share computing power hardware sector has declined significantly, the chip structure has improved somewhat, and with the resonance of overseas demand expansion and domestic substitution, computing power hardware is expected to usher in the second wave of the M-shaped top. The AI technology market is also expected to spread to the application side. Looking back at the mobile internet wave from 2012 to 2015, under the catalysis of technological breakthroughs and cost reduction and efficiency improvement, the technology industry chain market gradually spread from the hardware side to the application side. In this round of the AI wave, as model performance improves and inference costs decline, the space for AI commercial applications is expected to further open up. In early September, Meta launched the personal agent Muse, and at the end of September expanded Muse to small business operation scenarios, greatly broadening the scenarios for AI application implementation. Subsequently, OpenAI launched the agent Dots, which can continuously perform tasks in the background, competing with Muse. Competition among giants is expected to accelerate product iteration, ecosystem building, and user cultivation, driving AI applications from functional experience toward sustained use and commercial payment, and boosting expectations for the domestic application side. With the rapid development of multimodal large models, artificial intelligence is expected to penetrate many edge-side scenarios in the future, and fields such as consumer electronics and embodied intelligence have considerable growth space. Long-term capital accelerating entry + rising center of resource product prices, pay attention to resource-based dividend assets. Since the third quarter, dividend assets have performed relatively well and still have considerable appeal. As of 26/9/30, the valuation level of CSI Dividend relative to Wind All A is still at a historical low. The relative PE of CSI Dividend is 0.41, at the 40th percentile over the past 10 years, and the relative PB is 0.49, at the 29th percentile. From the perspective of dividend yield, the current dividend yield (TTM) of the CSI Dividend Index is 4.2%, at the 51st percentile over the past 10 years, near the historical median level. Therefore, from the perspective of historical relative valuation, dividends still have considerable appeal. Looking ahead to the fourth quarter, insurance capital may have demand to increase allocation to dividend assets. Judging from the market entry of large state-owned insurance capital this year, in 26H1 the net inflow of the five major listed insurers into A-shares may have been RMB 352.3 billion, accounting for 27.3% of their operating cash flow during the same period. If the five major listed insurers can meet the 30% market entry target this year, then the incremental capital entering the market by the five major listed insurers in Q3-Q4 may exceed RMB 200 billion. As policies actively guide medium- and long-term capital into the market, dividend assets may be expected to receive increased allocation from long-term capital in the fourth quarter. Pay attention to resource-based dividend assets with changes in supply-demand patterns, such as nonferrous metals, coal, and utilities. In addition, real estate and domestic demand sectors have catch-up potential under policy catalysis. In this bull market, sectors such as real estate and consumption have performed relatively poorly, with valuations and institutional allocations at low levels. On September 28, the State Council executive meeting required increasing the intensity of countercyclical adjustment of macro policy. Subsequently, real estate policy support further extended to the demand side. On September 29, the Ministry of Finance and two other departments introduced an interest subsidy policy for residents' home purchase loans. As policies to expand domestic demand continue to intensify, real estate and domestic demand consumption-related sectors may be expected to recover.