Embracing 2026: Saying Goodbye to a Single Narrative

1 Market Status: Enhanced US-China Linkage

Since November, the fluctuation range of A-shares and US stocks has synchronized and narrowed. The correlation of the 20-day price change between the CSI 300 and the S&P 500 has risen to above the 90th percentile for the year, presenting a new norm of "same direction overnight, opposite direction intraday." The fundamental reason lies in both countries' macroeconomic conditions entering a phase of "insufficient upward elasticity and converging downward risks," akin to the "Goldilocks" stage: the US core CPI has continued to decline to a three-and-a-half-year low of 2.6%. Although the unemployment rate has risen to 4.6%, it is mainly due to an increase in labor participation rate and temporary unemployment, which has not triggered the "Sam's Rule." The previously mentioned strong investment and weak consumption may become the norm; looking ahead, based on the experience of the last interest rate cut cycle, significant fiscal expansion that directly impacts residents is needed before inflation can rise further, at which point monetary policy constraints will re-emerge, and the upward window for commodities remains relatively long. In China, there is a combination of "corporate profit bottom" already visible and a decline in domestic demand momentum, which instead opens a window for subsequent policy strengthening.

2 Discussing the AI Industry Chain Again: Divergence in Individual Stock Trends and the Flourishing Physical Side

The core volatility of asset prices in both countries has further converged to the highly correlated AI investment chain at the industrial level. However, it is worth noting that recently, the investment in the AI industry chain has exhibited two major characteristics: first, as discussed in last week's report, the market diffusion, where "broad AI" assets (copper, lithium, aluminum, energy storage, and electrical equipment) benefit more from macro effects and perform better than core AI assets (computing power chips, optical modules, PCBs); second, investors' tolerance for the contradiction of "aggressive capital expenditure without revenue growth feedback" among companies in the industry chain may have decreased. Since late October, both Chinese and US AI tech stocks have entered a period of intensive earnings disclosures. From the stock price performance post-earnings disclosure, both markets show a negative correlation between the stock price performance of core AI stocks and their capital expenditure as a proportion of revenue. In our 2026 annual strategy outlook, we mentioned that the macro risks of AI are relatively small, but there are concerns about income verification at the micro level, and investors are currently pricing this risk. Meanwhile, the trend in physical investment remains a consensus in the market, with commodity futures prices for copper, aluminum, tin, and lithium carbonate, believed to be driven by AI investment, continuing to rise since late October. Copper and tin have shown a characteristic where near-month contracts are overall stronger than far-month contracts, indicating that changes in supply and demand may be the main driver.

3 How to Understand "Expanding Domestic Demand"? Goals, Paths, and Impacts

From the long-term mechanism of "increasing residents' income," efforts have begun to strengthen secondary distribution to improve residents' net transfer payment income by 2025 (raising the minimum pension standard and implementing childcare subsidies). In the future, optimizing primary distribution (increasing labor remuneration income) may be a key focus of the "income increase plan," such as guiding salary reform represented by state-owned enterprises. In terms of enhancing secondary distribution methods, in addition to the general public budget already tilted towards people's livelihood and social security this year, we may see in 2026: an expansion of the consumption tax and a shift in the collection phase, as well as an increase in the effective tax rate of corporate income tax under the condition of bottoming profitability International experience shows that during Japan's "income doubling" period from 1961 to 1984, and in the phases when U.S. residents' income outpaced GDP from 1969 to 1973 and 2014 to 2019, the proportion of services and new consumption continued to rise; China's salary increase cycle for government and public institutions from 1998 to 2001 also drove up the proportion of spending on housing, education, entertainment, transportation, and healthcare, indicating that after the implementation of the current "income increase plan," service consumption and technology-driven new durable goods will see an upward demand in the mid-cycle.

4 Welcoming 2026: From Single Industry Narrative to "Physical Side + Consumption Side" Dual Main Line

Recently, the limited macro elasticity and intensified industrial differentiation have led to a lackluster market, which instead provides investors with an adjustment mindset to welcome the window period of 2026: rather than betting on a single industry narrative where risk realization gradually increases and market concerns intensify, it is better to embrace the more certain "physical demand pull" and "domestic demand policy dividends." Our recommendations are: continue to favor industrial resource products that resonate with AI investment and global manufacturing recovery—copper, aluminum, tin, lithium, crude oil, and oil transportation; secondly, seize the consumption recovery channel driven by inbound recovery and rising resident income—aviation, hotels, duty-free, food and beverages; thirdly, benefit from the expansion of the capital market and the bottoming out of long-term asset returns in non-bank sectors (insurance, brokerage); fourthly, focus on China's equipment export chain with global comparative advantages and confirmed cyclical bottoms—grid equipment, energy storage, lithium batteries, photovoltaics, construction machinery, commercial vehicles, lighting, as well as domestic manufacturing varieties that are reversing from the bottom—printing and dyeing, coal chemical, pesticides, polyurethane, titanium dioxide.

The main text is as follows:

1 Market Status: Enhanced U.S.-China Linkage

Since November, the fluctuations in the U.S. and Chinese markets have begun to narrow, with the A-shares, taking the CSI 300 as an example, seeing the average daily fluctuation absolute value over 20 days narrow to the 39.7 percentile level this year, while the U.S. stock market, taking the S&P 500 as an example, saw the average daily fluctuation absolute value over 20 days narrow to the 33.7 percentile level this year. During the narrow fluctuations in both markets, their linkage has significantly strengthened, with the rolling 20-day correlation of the CSI 300 and S&P 500's fluctuations rising to over 90 percentile level this year, showing a clear characteristic of "same direction overnight, opposite direction intraday."

We understand that this enhancement in linkage is partly due to the similarity in economic fundamentals being in a state of "small upward elasticity, converging downward risks": the U.S. is currently still in a quasi-"Goldilocks" state—supported by this week's unemployment rate and CPI data, the narrative of a "soft landing." In November, the U.S. core CPI continued to decline, recording a year-on-year rate of 2.6% (the lowest level since April 2021), although there are market doubts about this inflation data due to the government shutdown in October, as the housing component adopted "previous value carryover." The method exists due to underestimation, while the "Black Friday" promotion may have led to an overestimation of the decline in vehicle prices. However, after excluding housing and used cars, the core inflation month-on-month growth rate has still fallen to a relatively low level since 2024. In terms of the unemployment rate, although it rose by 0.2 percentage points to a higher level of 4.6%, the three-month moving average has not triggered the "Sam Rule," and the labor participation rate has increased (new entrants) along with temporary unemployment being the main contributors to the rise in the unemployment rate. Therefore, from the perspective of the two indicators that the Federal Reserve is most concerned about—"employment-inflation"—the U.S. economy is neither experiencing a sharp decline nor facing inflationary pressures that would interfere with monetary policy. Looking ahead, based on the experience of the previous interest rate cut cycle, inflation will only rise further after a significant fiscal expansion directly impacts residents, at which point constraints on monetary policy will re-emerge. The characteristics of the domestic economic fundamentals are also similar to those in the U.S.: corporate profitability relative to the overall economy (value added, retail sales) is more resilient. Therefore, the recent weakening of domestic demand has instead created a favorable policy environment for further recovery in profitability, and the recent statements regarding "expanding domestic demand" have also corroborated the policy inclination.

2 The AI Industry Chain is Differentiating, Focus on Its Impact on the Physical Side

The enhanced interconnection between the Chinese and American markets is partly due to the continuous resonance of AI-themed investments and the increased relevance of the industry chain. The AI industry chain remains the sector with the highest industry prosperity in both economies, mutually reinforcing each other. The United States has advantages in upstream (GPU, large models), while China excels in midstream manufacturing (optical modules, PCBs, heat dissipation). For North American cloud providers to realize AI revenue, they must place additional orders with the Chinese supply chain, and the confirmation of these orders in turn validates the revenue of cloud providers. Therefore, incremental information in the AI industry chain always causes fluctuations in related stocks in both markets simultaneously.

However, it is noteworthy that recently, investment in the AI industry chain has exhibited two major characteristics: first, as discussed in last week's report, the market has expanded, with "broad AI" assets (copper, lithium, aluminum, energy storage, and electrical equipment) benefiting more from macro effects and performing better than core AI assets (computing power chips, optical modules, PCBs); second, investors' tolerance for the contradiction of "aggressive capital expenditure lacking revenue growth feedback" among companies in the industry chain may have decreased. Since late October, both Chinese and American AI tech stocks have entered a period of intensive earnings disclosures. From the stock price performance post-disclosure, stocks in both regions show a negative correlation between the performance of core AI stocks and their capital expenditure as a proportion of revenue.

In our 2026 annual strategy outlook, we mentioned that the macro risks of AI are relatively small, but there are concerns about revenue verification at the micro level, and investors are currently pricing this risk. Meanwhile, the trend in physical investment remains a market consensus, with commodity futures prices for copper, aluminum, tin, and lithium carbonate, which are believed to be driven by AI investments, continuing to rise since late October. Among them, recent contracts for copper and tin have generally outperformed long-term contracts, reflecting that supply and demand dynamics may be the main reason.

3 How to Understand "Expanding Domestic Demand"? Goals, Paths, and Impacts

From the implementation path of "increasing income," efforts have begun in 2025 to strengthen secondary distribution to enhance residents' net transfer payment income (raising the minimum pension standard, implementing childcare subsidies). In the future, optimizing primary distribution (increasing labor remuneration income) may be a key focus of the "income increase plan," such as guiding salary reform represented by state-owned enterprises; In terms of enhancing the means of secondary distribution, in addition to the general public budget this year being tilted towards people's livelihoods and social security, we may see in 2026: an expansion of the consumption tax and a shift in the collection stage, as well as an increase in the effective corporate income tax rate under the condition of bottoming profitability.

Domestic and international experiences indicate that the growth of residents' income will lead to an increase in "new consumption" and service consumption. From domestic experience, in 1998, the Chinese government carried out large-scale institutional reforms, streamlining personnel in government and public institutions, which required appropriate increases in salary. According to the work report by then Premier Zhu Rongji at the Fifth Session of the Ninth National People's Congress, increasing the salaries of government and public institution personnel was part of "expanding domestic demand and increasing the income of urban and rural residents, especially low-income groups." In the following three years, the average salary of state agencies rose compared to the wages of non-private urban units, coinciding with "China's accession to the WTO" and the commercialization of real estate, leading to an increase in the proportion of residents' consumption expenditure on housing, education, culture and entertainment, transportation and communication, and healthcare.

From international experience, Japan proposed a 10-year "National Income Doubling Plan" in 1961, and in fact, Japanese residents' income maintained high growth or outpaced GDP growth until 1984. Between 1964 and 1984, the expenditure structure of Japanese residents saw an increase in the proportion of housing utilities (rising rent and energy prices), transportation and communication (demand for car purchases), education and entertainment (tourism expenditure), and others (gifts). In the United States, from 1969 to 1973, wage inflation was significant, and during these five years, service consumption drove personal consumption expenditure more than goods consumption. Within service consumption, housing, healthcare, transportation, leisure and entertainment, financial and insurance services, and other services all showed positive growth over the five years; in goods consumption, mainly durable goods such as entertainment products, other durable goods, and non-durable goods such as alcoholic beverages, energy products, pharmaceuticals, leisure products, and personal care products also showed positive growth over the five years. From 2014 to 2019, the United States similarly achieved personal disposable income growth exceeding GDP, and during these six years, service consumption also showed stronger growth in personal consumption expenditure than goods consumption, with healthcare, dining services, and other services all showing positive growth over the six years; in goods consumption, mainly durable goods such as entertainment products (digital 3C), and non-durable goods such as food and beverages, and entertainment products showed strong growth.


4 Finding New Main Lines in a Lackluster Market for 2026

Since November, the correlation between the Chinese and U.S. markets has strengthened, reflecting that both economies are in a phase of weak upward elasticity and low downward risk. At this time, market fluctuations mainly stem from the tightly integrated AI investment chain between the two countries. However, it is noteworthy that the contradiction between aggressive AI capital expenditures and slow revenue growth is becoming a risk that investors are trying to avoid. As a result, there has been a divergence in stock price increases. In this context, our previously emphasized view of focusing on the macro effects brought by AI investment remains important: the recent increases and term structures of futures for copper, aluminum, tin, and lithium carbonate, which benefit from AI investment demand, also to some extent confirm the resilience on the physical side.

Looking back domestically, the "expanding domestic demand" strategy is being elevated, and the resident income increase plan may help the long-silent consumer sector return to investors' sight. Service consumption and new consumer goods closely linked to current technological advancements are the focus for the next stage.

We recommend:

First, the industrial resource product chain (copper, aluminum, tin, lithium, crude oil, oil transportation) benefiting from the upward adjustment of AI investment guidance and the global manufacturing recovery expectations during the interest rate cut cycle;

Second, with capital inflow and an increase in inbound travelers, China's consumption is entering a recovery phase (aviation, hotels, duty-free, food and beverages).

Third, non-bank (insurance, brokerage) capital expansion and the long-term asset side benefiting from the bottoming out and recovery of capital returns forming a resonance;

Fourth, opportunities in China's equipment exports (grid equipment, energy storage, lithium batteries, photovoltaics, construction machinery, commercial vehicles, lighting equipment) and the bottom reversal of advantageous manufacturing industries in China (printing and dyeing, coal chemical, pesticides, polyurethane, titanium dioxide).

Source: YiLing Strategy Research Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk