CITIC Securities Strategy: What are the main contradictions in market pricing in 2026?

1. What are the main contradictions in market pricing for 2026?

In our judgment from “When will we sound the counterattack horn on March 22?”, we assert that “the escalation of short-term conflict intensity may actually be brewing an opportunity for both parties to negotiate, with negotiations being the benchmark for subsequent trends, and the horn for market counterattack is often quietly sounded at the most pessimistic emotional moments.” After the situation escalated at the beginning of this week, with Trump’s two TACO announcements and both sides officially entering the negotiation phase, the above viewpoint is beginning to be validated.

Looking ahead, we maintain the judgment that “the short-term situation may still have fluctuations, and mid-term de-escalation will be achieved through negotiations.” Therefore, the current two core concerns of the market: the systemic risks caused by the continued uncontrolled escalation of conflict intensity, and the economic stagflation or even recession risks caused by high oil prices, may not be the end of this round of conflict. Rather than worrying about the emergence of these two extreme pessimistic scenarios, we need to consider: what are the variables that cannot return to normal in the short term after this round of conflict? We believe the core issue lies in the changes in global liquidity expectations caused by the elevation of oil price levels, and the profound impact it brings to the market pricing environment.

We previously emphasized in the 2026 Annual Strategy “All Things Compete” that “the shift from valuation-driven to earnings-driven will be the biggest change in this year’s A-share pricing compared to last year.” On one hand, this is due to historical experience showing that “A-shares cannot sustain high valuations for three consecutive years,” and on the other hand, it is supported by the new upward cycle of PPI for corporate earnings recovery. Since the beginning of this year, from a global perspective, a series of landmark events have triggered changes in the strength of the dollar and global liquidity expectations, further accelerating the market pricing switch towards earnings-driven and certainty-driven.

On one hand, as the underlying logic of “weak dollar,” which once dominated global asset valuation expansion, faces challenges, the market pricing factors are gradually focusing on certainty. In the past year, “weak dollar” has been the core variable driving the expansion of global asset valuations. This optimistic expectation continued to ferment as of January this year, with high valuations, small market caps, loss-making stocks, and high volatility representing the valuation expansion direction continuing to dominate. However, with the liquidity tightening expectations triggered by the nomination of Waller in late January and the outbreak of the U.S.-Iran conflict at the end of February strengthening the petrodollar system, the underlying logic of global asset valuation expansion has been challenged, and market pricing has gradually shifted towards low valuations, dividends, quality performance, and low volatility.

On the other hand, historical experience shows that supply shocks often have a certain degree of persistence in their impact on the oil price level, meaning that this year the market needs to gradually adapt to the changes in the allocation environment brought about by the elevation of oil price levels. Reviewing the six historical rounds of oil supply shocks, except for the 2022 Russia-Ukraine conflict caused by the Fed’s aggressive interest rate hikes leading to a global recession and a significant weakening of demand, in the other five rounds of conflict, the oil price level systematically rose compared to pre-war levels, with increases ranging from 10% to 300%. Although the geopolitical risk premium may decline as the situation cools, the actual supply shocks that push up crude oil transportation and insurance costs, along with the slow recovery of production capacity, make it difficult for the oil price level to return to pre-war levels in the short term.

The systematic rise in the oil price level after the conflict will impact the monetary policy paths and liquidity expectations of global central banks, making it difficult for this year’s “valuation expansion” to proceed as smoothly as last year, marking a significant change in the allocation environment this year. Over the past year, global assets shared a liquidity easing beta, driven by the coordinated interest rate cuts of major global central banks. However, since the beginning of this year, especially after the high oil price shocks, the policy tone of central banks around the world has clearly shifted towards prudence and caution. It can be anticipated that as the oil price level systematically rises, central banks will require more data and a longer time to verify its effects on the economy and inflation, leading to a marginally tightening liquidity environment, which may make this year’s “valuation expansion” difficult to proceed as smoothly as last year, representing a significant change in the allocation environment this year.

Currently, even if all of the above scenarios have not yet occurred, they have already tangibly influenced market expectations. According to our survey from March 23 to 25 involving over 260 domestic core investment institutions’ fund managers, research heads, and macro researchers, the distribution of market expectations for this year’s A-share expected returns and earnings growth has already begun to converge. This indicates that most investors are narrowing their expectations for the expansion space of A-share valuations this year, with earnings growth becoming the main contributor to returns this year.

Therefore, for this year, not only is the transition of A-shares’ bull market in its second phase towards earnings-driven narratives, along with the support of a new round of PPI increases for earnings recovery, but also the changes in global liquidity expectations triggered by the elevation of oil price levels after this round of conflict will further accelerate the main contradiction in market pricing from prior valuation expansion to earnings-driven and certainty-driven dynamics. This is what we believe is the true logical change that this round of conflict leaves for the market, which needs to be repeatedly strengthened in cognition and emphasized for a long time to come.

2. April: Time Will Stand on the Side of Economic Certainty

Regarding April’s allocation, the market has effectively chosen the certain direction of “winning amidst chaos” for us back in March. We have summarized the sub-sectors that have performed well in A-shares since the U.S.-Iran conflict, which can be categorized into “three certainties”:

Strong performance certainty and robust economic logic: represented by the North American computing power chain (communication equipment);

Energy alternatives and price transmission directions that benefit from the rise of oil price levels: new energy industry chain (batteries, new energy vehicles, photovoltaics, wind power, power grids), coal, public utilities (electricity, gas), agricultural products, etc.;

Domestic demand and defense-oriented certainty risk-averse directions: banks, food and beverage, infrastructure, etc.

Looking ahead to April, as the earnings season focuses more on economic performance, we believe that time will favor the “economic certainty” of the three “certainties” mentioned above. Based on this, we have three projections for the future structure: 1) For technology and overseas supply chain products, after the earlier concentration on pricing discounts due to geopolitical risks and liquidity tightening expectations, given their independent industrial trends and that their fundamentals are less affected by oil prices, the earnings season may actually allow them to become the certain focus of the market due to their independent economic performance, with more high-quality directions expected to perform well; 2) For price increase chain products, as pricing clues have significantly increased in the first quarter, overall economic performance is expected to be validated by earnings reports, which is a line of inquiry that cannot be ignored beyond technology growth, but internal differentiation is likely to occur based on economic performance, especially for products that have price increases driven by oil as a cost; 3) For those dividend and domestic demand products that rely solely on risk-averse sentiment, if the earnings season cannot validate economic performance, the subsequent excess benefits will likely gradually decline.

3. Which specific directions are worth paying attention to?

First, the recently disclosed industrial enterprise profit data for January-February is expected to provide clues for the first quarter earnings reports. The profit growth rate of industrial enterprises in January-February improved significantly, rising from 0.6% at the end of last year to 15.2%, indicating that overall earnings in the first quarter are expected to accelerate upwards. At the industry level, we will correlate industrial enterprises with Shenwan industry classifications, tracking and evaluating the changes in profitability (profit growth rates) across various manufacturing sectors. From the latest data for January-February, the industries expected to see accelerated profitability in the first quarter mainly include TMT, non-ferrous metals, chemicals, and non-metallic materials (building materials, non-metallic materials, etc.). Additionally, industries such as coal, food manufacturing, paper, rubber and plastics, oil and gas, textiles, and electrical machinery are also expected to see marginal improvements in their first quarter earnings.

In terms of sub-sectors, through the upward revisions of 2026 profit forecasts since the beginning of the year, we identify directions that are expected to perform well in the first quarter, which are mainly concentrated in:

AI: hardware (consumer electronics, communication equipment, components, computer equipment, communication devices, electronic chemicals), software (games, IT services);

Advanced manufacturing and overseas supply chains: new energy (batteries, photovoltaics, wind power), military industry (marine equipment), machinery (rail transit equipment, specialized equipment, engineering machinery), commercial vehicles, medical services;

Cyclical price increase chains: non-ferrous metals, coal, steel, chemicals (rubber), building materials (glass, fiberglass), shipping ports, gas;

Consumer & finance: agriculture, retail, jewelry, securities firms, etc.;

Among the above sub-sectors, combining the price changes since March, we filter high-quality industries that have been significantly affected by external shocks, which are mainly concentrated in: domestic computing power (semiconductors), components, downstream AI (games, consumer electronics, IT services), advanced manufacturing (military, machinery, innovative pharmaceuticals), cyclical (non-ferrous metals, chemicals, steel, glass, fiberglass), service consumption & new consumption (retail, jewelry, pet economy), etc.

Risk Warning: Economic data fluctuations, policy easing below expectations, Federal Reserve interest rate cuts not meeting expectations, geopolitical tensions escalating, etc.

(Source: Industrial Securities)