Guosen: Will the growth style of technology reverse?

Guosen released a research report stating that during a bull market period, there is often a large differentiation in industry performance, followed by a rebalancing, but this doesn't necessarily lead to a style reversal. The necessary conditions for a style reversal are changes in the macro liquidity environment and significant catalytic factors in the fundamentals, but currently it is more of a rebalancing than a reversal. The market is expected to continue its short-term volatility, with industry allocation focusing on balanced allocation. There may be a shift in hotspots within the technology sector, with a focus on consumer goods such as real estate, liquor, and resource commodities that are improving in supply and demand. The core viewpoints are as follows: As the AI-related technology sector continues to dominate, the differentiation between growth and value sectors has become extreme. However, since the end of May, there has been increased volatility within the technology sector, with some long-dormant value sectors showing signs of performance. This week, the coal sector led the SHENWAN industry with a 6.4% increase. Discussions on whether there will be a reversal in style in the future have increased. This article analyzes the conditions under which style reversals have occurred historically, and explores the current market style trends and paths. After a significant differentiation in market sectors, a short-term rebalancing is likely to occur, but it may not necessarily lead to a reversal. As mentioned in last week's report, when market style differentiation is extreme, there tends to be a convergence in market trends. Currently, we are in a technology-led bull market, similar to the bull markets of 2013-2015 and 2019-2021, where technology has been a leading sector. Therefore, by comparing the deviation of technology financing as a percentage of total market financing, we find that extreme market sentiment often occurs in the middle to later stages of a bull market, such as in 2013-2015, 2019-2021, and the current bull market. After extreme market sentiment differentiation, there has been varying degrees of style convergence. Historically, after extreme market sentiment differentiation, there have been different degrees of style convergence. In most cases, a style rebalancing occurs, such as in 20/07-21/03 and 25/09-25/11. In the former case, there was a moderate rebound in cyclical and financial real estate sectors at the end of 2020, followed by a return to growth themes. Only a few instances have seen actual style reversals, such as in 14/10-14/12, when value sectors significantly underperformed growth sectors before witnessing a surge in value sectors like non-banking financial institutions and real estate at the end of 2014, while technology sectors saw declines. The necessary conditions for style reversals in history are changes in the macro liquidity environment and significant catalysts in the fundamentals. In the late stages of a bull market, as the main market trends reach extreme levels, there is often a phase of style change. Based on this, we have chosen the two most recent bull markets, those of 2013-2015 and 2019-2021, to explore why, under similarly extreme market sentiment differentiation, the market trend towards rebalancing in 2020-2021, while experiencing a more dramatic style shift at the end of 2014. This difference may have been mainly due to differences in liquidity and fundamental environments. The style reversal at the end of 2014 was primarily driven by abundant macro and micro liquidity, as well as market expectations for improved fundamentals in cyclical sectors. From January to October 2014, growth sectors significantly outperformed value sectors, but at the end of 2014, value sectors such as financials and real estate saw significant gains. Between November and December 2014, non-banking financial profits surged by 100.4%, while banks saw a 55.7% increase, while the previously strong growth sectors like electronics lagged behind. The key drivers behind the style reversal were the following: from a liquidity perspective, at the end of 2014, both macro and micro liquidity were abundant, with the central bank implementing four interest rate cuts and two reserve requirement ratio cuts between November 2014 and June 2015. From a fundamental perspective, the market's expectations for cyclical sectors improved under the backdrop of lower interest rates and reserve ratios. The net profit growth rate of cyclical sectors like financials and real estate increased gradually, providing support for the style shift. The style in 2020-2021 only saw a rebalancing, as traditional value stocks like real estate and banks lacked fundamental logic catalysts and there were expectations of a tightening macro liquidity environment. At the start of the bull market from January 2019 to July 2020, technology led the rally significantly, but then from October 2020 to February 2021, cyclical and financial real estate sectors took the lead with gains of 19.9% and 5.8% respectively, while growth sectors like advanced manufacturing had gains of 14.3%. In this mid-term of the current bull market, there hasn't been a significant style reversal primarily due to two reasons: from a liquidity perspective, although funds are still entering the market at the micro level, there were signs of marginal tightening in the macro liquidity environment at the beginning of 2021; from a fundamental perspective, after March 2020, the cyclical sectors saw fundamental improvements, but traditional value stocks like real estate and banks still lacked fundamental support, especially after the release of the "three red lines" policy for real estate in August 2020. In 2021, real estate prices and sales volumes peaked. Therefore, the market style did not undergo a significant shift. The current market trend is likely a style rebalancing, and the probability of a style reversal is low. In several previous reports, we have discussed the key determinants of style, and in the medium term, economic fundamentals, liquidity, and relative valuations are not the core determinants of style, but rather the relative trend of fundamentals is the key factor. During a bull market, there may be brief swings in style, but in the later stages, the market style tends to follow the relative trend of fundamentals. In this current situation, the trading heat in the technology sector has once again approached historical highs, while some value sectors with relatively small gains in the past are at historically low valuations and holdings. The market may be ready for a rebalancing, but a style reversal is unlikely to occur. Firstly, from the perspective of fundamentals, technology still maintains its relative advantage. The macro and micro fundamentals are currently in a phase of repair. Although sectors representing the old economy, such as the real estate chain, are showing signs of improvement, the relative fundamental advantage of technology over traditional value sectors continues to expand. Looking at the latest industrial profits, the profit growth rate in the electronic equipment industry is as high as 78.6%, while industries like building materials and downstream food show weaker profit growth rates. Looking at the first quarter reports of listed companies, the cumulative year-on-year profit growth rate for the technology sector in Q1 2026 and Q4 2025 was 30.4% and 19.8%, respectively, while for the financial real estate sector, it was 2.1% and 5.4% during the same period. Secondly, the macro liquidity environment is relatively stable this time. As mentioned earlier, one of the important drivers of the short-term style reversal at the end of 2014 was the ample macro liquidity under the background of reserve requirement ratio and interest rate cuts. In comparison, although funds are still entering the market at the micro level, there are differences in the pace of fund inflows and the stage of macro monetary policy compared to 2014. The first quarter of 2026 monetary policy implementation report emphasized the maintenance of stable operation in financial markets, indicating a relatively stable monetary policy direction. The market may continue to consolidate in the short term. There are usually two paths for a market style rebalancing one is a market downturn where industries with large previous gains experience deeper corrections, and the other is in a sideways market where weaker industries gradually catch up. The latter scenario is more likely this time. The recent market trends are gradually confirming this assessment. This week, the market continued to consolidate, with the SHANGHAI index falling by -0.3% and the SHANGHAI 300 rising by 0.3%. At the same time, there is a convergence in market structure. This week, there was some differentiation within the technology sector, with value sectors like coal showing signs of performance. This indicates that the current rebalancing is not achieved through a significant overall market decline, but rather through sector rotation and structural diffusion. Looking ahead, in the short term, A-shares may consolidate while maintaining an upward trend in the medium term, indicating that the bull market is likely to continue. Historically, the transition from a bull market to a bear market requires signals such as overheated market sentiment and a noticeable weakening in the macro environment, which are currently not present. In the short term, emphasis should be placed on balanced allocation in a style rebalancing context. As mentioned previously, extreme differentiation in industry structures during a bull market phase often results in convergence. Therefore, it is recommended to focus on balanced allocation at this time. There may be a shift in hotspots within the technology sector. Some areas of the technology sector in the A-shares market have experienced significant gains recently, and there may be a possibility of a temporary cooling off in the short term. However, in the medium term, the trend in the AI industry is expected to continue, and after market sentiment stabilizes, sectors such as fiber optics may still see continued growth. In addition to hardware sectors that have experienced significant gains, the upstream power sector may also benefit from the economic expansion. From a rotation perspective, in the short term, sectors like human-shaped Siasun Robot & Automation and commercial aerospace may show positive catalysts in specific industries or may turn upwards. The consumer sector represented by real estate and liquor may have opportunities for gains. In this bull market phase, sectors like real estate and liquor have shown relatively stagnant growth and are currently undervalued with low holdings. The fundamentals of both real estate and liquor have been steadily improving since the beginning of the year, and there have been continuous positive catalysts for these sectors recently. On May 28th, the State Council issued the "15th Five-Year Plan for Urban Renewal", which outlines 14 major projects and actions such as the construction of "good houses". Looking ahead, with the continuation of policies supporting domestic demand, there may be opportunities for gains in these sectors. In addition, resources and commodities that benefit from an improvement in supply and demand dynamics should be monitored. Since March, except for oil and gas, the overall performance of resource sectors has been relatively poor. However, a recent executive meeting of the State Council has included several minerals in the national strategic mineral catalogue, coupled with the emergence of new demand in certain sectors driven by AI and new energy industries, indicating that sectors like non-ferrous metals may continue to benefit from improved supply and demand dynamics. Additionally, in the third phase of a bull market, trading volume tends to increase further. Currently, the market is entering the third phase of the bull market driven by sentiment, where brokerage firms with flat performance but noticeable improvements in profitability may be worth watching. Risk Warning: Geopolitical tensions worsening beyond expectations, and fluctuations in the recovery of the domestic economy.