CMSCA Stock 2026 Midterm Strategy Outlook: Sector differentiation will further intensify AI remains the biggest theme.

CMSC publishes research report, stating that the current market has entered the third phase of market uptrend, with market momentum shifting from incremental liquidity to profit fundamentals, and the global economy showing a K-shaped differentiation. The domestic economy's momentum is shifting, with high-end technology manufacturing leading the way, while traditional sectors such as real estate and consumer goods continue to be under pressure. External demand is improving, while domestic demand remains weak. Technology has replaced securities as the core theme of the market uptrend, with AI capabilities serving as the market indicator. Looking ahead to the second half of the year, the index is expected to moderately rise driven by the technology sector, with the fourth quarter potentially being a turning point for the growth value style switch. Focus should be on the AI industry chain, export prosperity, and resource and energy security. Key points from CMSC are as follows: Global K-shaped differentiation intensifies: The K-shaped differentiation in the global market cannot be explained by market risk preferences or abundant funds. It reflects the deviation of the global economy in the capital markets. In the overseas market, the US economy is currently closer to a "narrow-based resilience" supported by a few strong entities, rather than a broad-based recovery driven by employment, income, consumption, and profitability. Domestically, with the marginal weakening of the total economic volume, the main theme of the year has shifted from "total recovery" to "momentum shift." High-end technology manufacturing leads economic growth, while traditional growth pillars are under pressure, and consumption, real estate, and traditional cycles remain weak, making it difficult to contribute to total recovery. Demand continues to be structurally split, with strong certainty in export demand and overall weakness in domestic demand. Fiscal support is mainly structural without large-scale expansion. Overall, the economy presents an extreme differentiation feature of "strong technology, weak traditional, strong external demand, weak internal demand." Technology remains the overarching theme: According to the analysis framework of the bank, the current market is in the third phase of market uptrend, where the index cannot rely on loose liquidity and incremental funds to rise but must return to the most certain direction of performance and profitability. Globally, EPS trading has become the consensus in the equity market, and the widespread "K" shape differentiation makes the technology sector's profitability more leading compared to other directions. In this market uptrend, technology has replaced securities and become the new "bull market leader," with the bank optimistic that the index will moderately rise in the second half of the year driven by the technology sector. Market style outlook: The fourth quarter may be a turning point for the growth value style switch. Looking back at history, there has been a shift between growth and value styles every 2-3 years since 2010. Liquidity and trends in emerging industries are core drivers of this shift. The current growth has continued for nearly two years, with significantly higher excess returns in growth compared to value, high institutional holdings in TMT. The fourth quarter may be a turning point for the growth value style switch. Potential driving factors include: 1) Market preemptively trading the Fed rate hike, with the hike likely to take place early in 2027; 2) Changes in AI technology sector performance and expectations. Liquidity and funding outlook: Financing and private equity likely to continue providing significant increments in the second half of the year. Supply of funds is expected to continue improving, with private equity fund sizes likely to increase again, contributing significant incremental funds. Net inflows of financing funds may continue to expand, becoming a significant increment to the market. Additionally, public equity funds will continue to see increased issuance, although explosive growth in public equity funds issuance like in the previous two market uptrends may be difficult to achieve. Equity mutual funds are expected to see slight net redemptions, maintaining structural support, without large-scale expansion. Overall, funds demand is expected to continue to rise after market improvements, with areas such as IPO, refinancing, and shareholder reductions potentially expanding from the first half of 2026. Based on supply and demand calculations, A shares are expected to see a net inflow of approximately 510 billion yuan in the second half of 2026. Industry trend and allocation recommendations: Focus on the AI industry chain, export prosperity, resource and energy security. In combination with the macroeconomic environment, mid-term prosperity and performance, and industry trends, the bank recommends focusing on the following three themes for the second half of the year: first, focus on the direction of the AI technology chain, such as electronic fabrics, high-speed resins, HVLP electronic copper foil, ABF film, indium phosphide, ceramic powders, light modules, PCB/copper foil boards, storage, fiber optic cables, semiconductor equipment and materials; second, focus on outward expansion, especially in sectors with increased foreign demand for inventory, higher overseas revenue for listed companies, higher penetration of goods overseas, such as batteries, wind power equipment, grid equipment, engineering machinery, general equipment, automation equipment, agrochemical products; third, focus on resource security and energy system restructuring, such as non-ferrous metals (industrial metals, minor metals, energy metals), power equipment (batteries, energy storage, wind power equipment). Overall, the bank recommends focusing on the electronic industry (semiconductors, components, electronic chemicals), power equipment (batteries, wind power equipment, grid equipment), machinery equipment (automation equipment, specialized equipment), non-ferrous metals (energy metals, minor metals, industrial metals), and non-bank (securities) industries. Industry investment opportunities: A shares showed significant structural differentiation in the first half of 2026, with the major index performing relatively mildly, while the technology industry chain significantly outperformed the market. Trading in the market is mainly focused on global AI capital spending, domestic semiconductor substitution, upstream material price hikes, and trading in areas with performance support. Looking ahead to the second half of the year, sector differentiation is expected to intensify further, with AI remaining the major theme. Global markets are focused on assessing the profitability of AI, internal differentiation within the technology sector, moving away from speculative trading, and funds are likely to switch to directions with certain performance and sustainable industry trends, as well as areas where industry "from zero to one" breakthroughs are possible. Based on this theme, the bank believes that the main investment opportunities in the second half of the year will be in overseas AI power, domestic AI power, rising commodity prices, and commercial aerospace. A-share profit outlook: In the first quarter, driven by technology innovation and rising commodity prices, A-share profits exceeded expectations. In the second half of the year, it is expected that the long-term demand for AI industries will continue, supply constraints will gradually appear after the clearance of manufacturing capacity, and the recovery of enterprise production will drive the start of a capital expenditure cycle. These three factors together will drive A-share profits into a steady upward trend. Looking at the profit cycle, revenue and profit are rebounding under the stimulation of technology and commodity prices, while the restoration of ROE is slow, indicating that profit quality has not entered a strong expansion phase; at the same time, with the clearance of production capacity in the past two years, the inventory cycle has entered an active replenishment stage, and capital expenditure has shifted from contraction to expansion. Historically, profit upturn cycles typically last 12-18 months, and this cycle is expected to continue until the first half of 2027. The bank predicts a full-year cumulative growth rate of 9.2%; A-share non-financial profit growth rate: assuming a neutral scenario, cumulative profit growth rates for the second, third, and fourth quarters are expected to be 13.5%, 13.3%, and 15.6%. In major industries, sectors with higher profit growth rates are expected to be information technology, middle-stream manufacturing, and commodities. Policy Outlook: Overseas attention to the impact of the US midterm elections on the global situation in the second half of the year. After entering a critical window before the midterm elections in the second half of the year, the mutual disturbance between policies and markets may significantly increase. On one hand, if economic data remains strong and inflation does not fall as expected, the market could worry about the Fed maintaining a tight stance or delaying easing, leading to a temporary rise in long-term US bond yields and the dollar, putting pressure on high-growth sectors with high valuations. On the other hand, if the stock market falls or signs of weakening employment or consumption emerge, the White House is likely to increase its statements and pressure on monetary policy, trade, fiscal policy, or regulatory policy to maintain the narrative of "good economic performance" for the elections. Domestically, under the framework of "coordinated development and security," it is recommended to consider security issues as an important theme for observing policy adjustments, focusing on resource security (including energy security) and autonomous control of the industrial chain. Risk warnings: Economic data falls short of expectations; Fed policy easing progresses slower than expected; Industrial support less than expected.