Shenwan Hongyuan Group Co., Ltd. has released a research report stating that some back-and-forth in the US-Iran standoff is to be expected. The market has already priced in the extended timeline anticipated for this geopolitical contest. Mid-term macroeconomic scenarios have largely converged, indicating that the phase where US-Iran conflict was the primary driver of asset pricing—representing its most significant shock—is concluding. While further fluctuations are inevitable, their negative impact is likely to diminish with each successive wave. The firm reiterates that the current market bottom also represents a bottom for the small-cap growth investment style. The pattern of a "two-phase market rally" is re-emerging.

Key points from the report are as follows:

The expectation of a prolonged US-Iran standoff is already reflected in market valuations. The period where this conflict served as the dominant factor for asset pricing, marking its peak disruptive phase, is nearing its end. Although ongoing volatility is anticipated, its adverse effects are expected to lessen progressively. Prior to any return to negotiations, intense maneuvering between the US and Iran continues. This back-and-forth is rational, and its potential to surprise capital markets is limited. The report reaffirms the convergence of three important mid-term macroeconomic scenarios: 1. A consensus has formed that the US-Iran standoff will be a long-term issue. Corresponding adjustments to core asset pricing have already occurred. 2. The mid-term outlook was never one of stagflation. Initiatives for resumed US-Iran talks further reduce stagflation risks. The US labor market shows overall weakness with a K-shaped divergence, suggesting an economy prone to stagnation but not high inflation. Monetary policy must balance inflation control, employment support, and promoting manufacturing reshoring. Policy is likely to remain on hold during stagflation-like conditions and shift towards rate cuts in a recession-like environment, which is a high probability outcome. The only macroeconomic combination unfavorable for capital markets is "weak overseas economy + policy tightening," which now appears unlikely. A scenario of "policy easing to counter recession" would support the continuation of structural bull markets, potentially making macro factors less dominant. Historical experience from the Russia-Ukraine conflict suggests a pattern of sharp decline, rebound, followed by a slower declining wave. The latter was driven by a stagflation-like macro environment. The probability of such an environment emerging now is low, indicating that the current period likely represents the peak impact of US-Iran tensions on markets. Subsequent fluctuations should have progressively smaller effects. 3. Following diplomatic initiatives, the boundaries of mid-term macroeconomic scenarios are becoming clearer. Key convergences are being confirmed, signaling the end of the phase where US-Iran conflict is the primary pricing factor. Consequently, the recent low may well represent the market bottom for this adjustment cycle.

The report reiterates that this market bottom coincides with a bottom for the small-cap growth style. The structure of a "two-phase rally" is returning: 1. The market appears to have forgotten the bottom-up driven nature of the "first-phase rally." Macro top-down factors will not always be dominant. As the phase of US-Iran tensions as the primary concern passes, the effectiveness of bottom-up stock selection will return, albeit with a slow start to the recovery in market profitability. 2. The original mid-term pattern was a consolidative pause between structural and broad-based rallies. Following an oversold rebound, the market may re-enter a range-bound state, potentially facing increased resistance temporarily. Shenwan Hongyuan still positions the current phase as a consolidative interval within the "two-phase rally." This stage is primarily about earnings digesting some valuation excess and corrections absorbing part of the valuation premium. The key question is whether current earnings can justify valuations. The report notes that even under a relatively pessimistic macro assumption (a stagflation-like scenario with significant cost shocks), the year-over-year growth rate of net profit excluding financials for the entire A-share market in 2026 is still projected to be positive (Shenwan Hongyuan forecasts 6.2%). The core factor is that cost shocks impact corporate profits, but this impact is a gradual process. Historically, the three stages of PPI turning positive year-on-year, its central level rising, and peaking often correspond to three steps of increasing cost pressure. Therefore, 2026 might only experience the first stage of this cost shock. Given supply-side adjustments and improved inherent stability in profitability, positive growth in 2026 remains highly probable. Simultaneously, the gradual nature of cost pressures provides room for error should US-Iran tensions ease. Combining pessimistic earnings forecasts with a scenario where P/E valuations revert to historical medians by end-2026—a common first target after a first-phase rally adjustment—the point where the market初步prices out pessimistic expectations is not far from the previous low. Considering the convergence of mid-term macro scenarios and policies aimed at safeguarding the stability of Chinese capital markets, the recent low can reasonably be considered the "market bottom" for this cycle. The report continues to emphasize that this "market bottom" is also a "style bottom" for small-cap growth. Globally, value styles began outperforming growth around November 2025. Domestically, after rallies driven by computing power inflation, commercial aerospace, and AI applications, an adjustment phase for small-cap growth commenced in January 2026. The progression of market themes has been broadly consistent both internationally and domestically: starting from natural sector rotation and style shifts, progressing through HALO trades and the US-Iran conflict, the small-cap growth style now appears relatively attractive. Once the peak impact of geopolitical conflict on markets passes, and macro cycles and geopolitics cease to be primary concerns, the original mid-term pattern should gradually reassert itself. New economy sectors and strategic resources remain assets for the era's inflationary trends. The effectiveness of bottom-up stock selection will gradually return, profitability will stabilize, and a new upward phase will slowly begin. Hence, the "market bottom" is indeed the "style bottom" for small-cap growth.

Looking ahead, the "two-phase rally" is expected to gradually re-emerge. For the current stage, two points are highlighted: 1. During the phase dominated by US-Iran asset pricing, the market seemed to forget the core, bottom-up characteristics of the "first-phase rally." As macro top-down factors recede from dominance, bottom-up structural selection will regain effectiveness, leading to a slow recovery in market赚钱效应. 2. The consolidative phase following the "first-phase rally" is likely to persist for some time. The recent broad-based oversold rebound occurred this week, but as the market potentially returns to a core trading range, a period of increased resistance and structural divergence is expected.

Sector recommendations remain unchanged: During the consolidative interval between the two rally phases, high-elasticity investment opportunities will still primarily stem from extensions of the technology theme and expanding macro narratives. In this stage, opportunities in specific sub-sectors can be profitable, but broad sector coordination is weak, making widespread profitability diffusion difficult. Within the technology "re-realization" theme that was strong prior to the US-Iran tensions, short-term opportunities persist, with focus on optical communication, gas turbines, and energy storage. For the next phase, new energy, new energy vehicles, and the export chain represent sectors where improving fundamentals can be verified. While their hedging effect has been limited recently, investing based on improving景气 remains a significant opportunity later. During consolidation, high-elasticity opportunities still arise from tech theme extensions and macro narrative expansion. Specific sub-sector performances may vary, but broad sector momentum is lackluster, requiring strategic shifts among a few promising trends. The phase of risk aversion due to US-Iran tensions generally suppressed high-elasticity investments. As the peak impact fades, effective rotation among high-elasticity sectors should resume. Specifically, the tech "re-realization" direction, previously strong, retains short-term elasticity—focus on optical communication, gas turbines,储能. For subsequent rotation, focus on new energy, new energy vehicles, and the export chain. In the low-risk-appetite phase, new energy was seen as a hedge but performed poorly. However, as evidence of order growth, supply-demand improvement, and effective price pass-through to international markets emerges, these sectors will present important opportunities during a景气-driven investment phase. Furthermore, new energy could form the structural basis for foreign capital回流 and a reassessment of country-specific relative strengths, creating a direction with upward potential and diffusible profitability.

Risk warnings include overseas economic recession exceeding expectations and domestic economic recovery falling short of forecasts.