Shenwan Hongyuan Group Co., Ltd. reiterated its medium-term outlook for a "two-phase rally." Following a short-term rebound from oversold conditions, the market is expected to enter a phase of consolidation and adjustment, with a potential new round of record-breaking gains possibly emerging in the second half of 2026. The second quarter warrants close attention to key event validations in May, as well as new sources of growth momentum. The firm believes that in the next phase, sectors such as new energy, new energy vehicles, and the export supply chain may see increased validation of their growth momentum and could potentially stage independent rallies. For short-term thematic diffusion plays, focus areas include commercial aerospace and semiconductors.

Shenwan Hongyuan's key views are as follows:

First, the firm reaffirms its medium-term expectation of a "two-phase rally." After a short-term rebound from oversold levels, a period of consolidation and adjustment is likely to follow, with a potential new round of record highs possibly occurring in the second half of 2026. The current market bottom also marks a style bottom for small-cap growth stocks. Sectors that previously outperformed are experiencing a slow start in terms of profitability improvement. The emergence of independent rallies in a few structurally strong sectors is typical during consolidation phases. However, these sectors are still subject to market dynamics; after short-term concentrated gains reflecting high earnings growth, they tend to transition into a phase of high volatility. The firm's near-to-medium-term market view is being validated, reiterating that amid U.S.-Iran tensions, macroeconomic scenarios have narrowed, with particularly pessimistic outcomes largely ruled out. The phase where U.S.-Iran conflict was the primary driver of asset pricing has ended, and risk appetite has bottomed out and begun to recover. The market is returning to a medium-term pattern of a "two-phase rally." After the short-term oversold rebound, the consolidation phase may persist for some time. By the second half of 2026, the market may overall break upward into a new round of record highs.

The current market bottom also represents a style bottom for small-cap growth stocks. The adjustment in small-cap growth stocks has undergone a shift in offensive structures toward pro-cyclical sectors, HALO trading, and a sell-off in high-risk assets triggered by U.S.-Iran tensions, with both the duration and magnitude of the adjustment being relatively thorough. The resurgence of growth styles is occurring in sync between China and the U.S., with the Nasdaq hitting new highs and the ChiNext Index also reaching record levels. This supports the view that A-shares are likely to remain in an upward trend medium-term. For sectors lacking new catalysts, absolute and relative return lows have likely already appeared, but any rally may be slow to start, with new highs potentially taking place on a quarterly timeframe. The ChiNext Index's independent rally is reasonable but remains constrained by the dynamics of industry trend cycles. Its short-term gains correspond to high earnings growth, with no significant expansion in valuation multiples, indicating relatively strong intrinsic stability. Historical reviews of consolidation phases suggest that extensions of industry trends and expansions in macroeconomic narratives can still yield high-elasticity investment opportunities. However, with overall valuations in elevated ranges and weak sector linkage, independent rallies in fundamentally sound sectors driven by specific growth catalysts are common. The pattern of independent rallies remains valid: industry growth validation → stock price increases and valuation expansion → short-term cost-effectiveness declines, medium-term valuation constraints emerge → rally stagnation, sideways consolidation, awaiting key catalysts for direction. After recent concentrated gains, the ChiNext Index is transitioning into a phase of high volatility.

The supply and demand environment for short-term market liquidity: ETFs, allocation funds, fixed-income-plus strategies, and quantitative funds constitute the marginal liquidity driving the "first-phase rally." Currently, the negative liquidity cycle triggered by U.S.-Iran tensions has ended, but short-term incremental inflows remain weaker compared to Q1 2026. While sector ETF scales have stabilized after rapid contraction, overall inflows have not yet turned positive, with only a few momentum-driven ETFs seeing expansion. Allocation fund inflows peaked in Q1, but with mid-year being a low season for premium growth, incremental inflows are weakening marginally. Fixed-income-plus strategies have quickly recovered after a pulse-like contraction. Only structural incremental liquidity exists currently, with overall liquidity inflows weaker than in Q1 2026. Such a liquidity environment is sufficient to support a rebound but may be inadequate for a sustained breakout. After A-shares quickly returned to their medium-term core range, a period of consolidation and adjustment is still needed.

Second, the Q1 earnings validation period is concluding, and the "reality-focused" market characteristic requires new anchor points. What to watch in Q2? 1. Key event validations in May: Trump's potential visit to China and monetary policy signals around the Federal Reserve chair transition. 2. New sources of growth momentum, particularly whether China's supply chain security and energy security can translate into growth alpha for the export supply chain. 3. With the non-earnings period underway and overall profitability at relatively low levels, thematic activity and profitability diffusion may stage periodic rallies. During the recent A-share earnings validation period, a "reality-focused" approach was the core market characteristic, with tech leaders exceeding earnings expectations offering the main opportunities. Post-earnings season, key Q2 focuses include: 1. Few major macroeconomic validation nodes in Q2, with May's potential Trump visit to China serving as a key test for geopolitical trends. Monetary policy expectations may become clearer around the Fed chair transition in May. 2. Structural economic highlights remain more externally than domestically driven. Even if domestic demand improvement continues, concerns about sustainability persist, making high-elasticity investment opportunities unlikely. However, China's supply chain and energy security may translate into growth alpha for export chains, validating product price increases and cost pressure pass-through overseas. This could become an important new source of high growth. During phases where manufacturing sectors show promise, combined foreign capital回流 and Middle Eastern capital inflows may create resonance, enhancing rally elasticity. 3. Current significant gains are concentrated in tech leaders, with profitability diffusion still不明显. As the Q1 earnings season concludes and the earnings vacuum begins, a window conducive to thematic rallies emerges. Periodic thematic activity and profitability diffusion may follow.

Third, after concentrated gains in ChiNext leaders, the market is transitioning to high volatility. The firm continues to highlight that in the next phase, new energy, new energy vehicles, and the export chain may see increasing growth validation and potentially stage independent rallies. For short-term thematic diffusion plays, focus remains on commercial aerospace and semiconductors. Recent concentrated gains in ChiNext leaders reflect high earnings growth, but conditions for significant valuation expansion in the short term are weak, leading to a transition toward high volatility. At this stage, sector rotation will not stall; high-elasticity investment opportunities are more likely to emerge from new growth sub-sectors. The firm reiterates that new energy, new energy vehicles, and the export chain may see continual growth validation. The effectiveness of "buying growth" may significantly outperform earlier "buying hedge" strategies. Periodic thematic diffusion rallies may follow, with commercial aerospace and semiconductor sectors currently seeing consensus building and ETF scale expansion.