CITIC SEC: Fiscal and monetary loosening, momentum in US stocks can continue until 2026.

CITIC SEC released a research report stating that midterm elections, loose policies, ample liquidity, and positive fundamentals are the core support for the US stock market in 2026. At the same time, although the AI bubble may be difficult to burst in the short term and private credit risks are controllable, caution is needed for high-interest rates and policy lag risks leading to a correction. In terms of valuation, although the dynamic price-earnings ratio seems to be at a high level, the US stock market still shows significant cost-effectiveness in the spiral of attracting passive funds with high growth expectations and the increase in the proportion of MAG8 market value. From a macro perspective, it is expected that the monetary policy in 2026 will continue to be loose (with interest rates expected to be 3.25%-3.4%), with OBBBA, tariffs, and "two houses" privatization supporting fiscal expansion; on the market liquidity side, stablecoin expansion, corporate buybacks, money market funds shifting to stocks and bonds, and increased allocation by individual investors will provide four-fold support. In addition, with the Token index growing exponentially, bottlenecks remaining in the supply chain, the strong cash flow and balance sheets of the four tech giants, and the extreme narrative of the "AI bubble" bursting unlikely to materialize in the short term, the recommendation is to focus on technology, manufacturing, resources, energy infrastructure (nuclear power), defense, internet diagnostics, and finance (banks). CITIC SEC's main points are as follows: After three years of continuous growth, are US stock valuations too high? In 2025, the US stock market experienced multiple rounds of fluctuations, shaking at the beginning of the year due to tariff expectations and the Fed policy game, entering a technical bear market in 2-4 months due to weak economic data and the implementation of tariff policies, and then rebounding with the temporary suspension of tariffs, progress in trade talks, and Fed rate cuts, reaching new highs within the year. By the end of October, the dynamic PEs of the S&P 500 and Nasdaq 100 had reached 22.9X and 27.8X respectively, placing them at historical percentiles of 99.5% and 93.2% since 2015. Although the dynamic price-earnings ratio of the US stock market seems to be at a high level, compared with comprehensive multi-dimensional valuation indicators, the US stock market still shows strong value in the global market. The NTM EPS growth expectations of the S&P 500 and Nasdaq 100 lead globally, and the PB-ROE match highlights the valuation cost-effectiveness. In terms of support logic, the revenue share of the MAG8 tech giants in the US and global GDP has been steadily increasing, reaching 7.1% and 1.9% in 2024, with Bloomberg's consensus expectations for 2025-2027 continuing to rise; since 2008, the investment style of the US stock market has shifted from active investment to ETF passive investment, with ETF net inflows totaling $4.04 trillion since 2015, while mutual funds have shown net outflows totaling $4.17 trillion, forming a positive spiral of "high fundamentals attracting incremental funds," and ETFs have stronger defensive capabilities in market downturns, further consolidating valuation resilience. Macro liquidity: Fiscal and monetary easing in the midterm election year. On the monetary policy front, despite facing a change in Fed chair in 2026, policy adjustments are still anchored to the dual mandates of stable prices and full employment. According to CGC reports, US companies laid off a total of 1.1 million employees in 2025 (a year-on-year increase of 44.4%), with 58% of companies planning to lay off employees in 2026 according to a survey by Resume.org. The ratio of job vacancies to unemployed persons has fallen to 0.98, indicating a weakening job market and providing support for ease. In September and October 2025, the Fed cut interest rates by a total of 50bps, and starting in December, it will stop shrinking its balance sheet and reinvest expiring MBS principal into short-term Treasuries (current share of short-term US Treasuries is only 4.7%), in line with CME and LSEG consensus expectations and the Fed's SEP pointing to a Fed funds rate of 3.25%-3.4% by the end of 2026. On the fiscal policy front, the OBBB Act passed in July 2025 will unleash expansionary effects in 2026, leading to a $3.4 trillion increase in fiscal deficits over the next decade, providing $947.2 billion in tax breaks to businesses; tariff revenues reached $194.87 billion in the 2025 fiscal year (a 250% increase from 2024) and are expected to continue to contribute to incremental revenue; resonance of short-term debt issuance and interest rate cuts alleviate interest payment pressures, coupled with the privatization of the "two houses" expected to bring in $240 billion in non-tax revenue (the bank estimates that this will reduce the fiscal deficit burden by about 14%), providing strong support for fiscal easing. Market liquidity: Four-fold support builds an abundant liquidity environment for the US stock market. Firstly, as stablecoin reserves pegged to the US dollar are limited to cash and short-term debt, the expansion of stablecoin size significantly increases the demand for short-term US Treasuries, thereby easing the liquidity leakage effect of US Treasury issuances on the stock market. Secondly, with the sustained improvement in US stock companies' profitability and the Fed's shift to loose monetary policy, the bank expects that by 2026, corporate buybacks will become an important source of incremental liquidity in the market. Additionally, if money market fund yields continue to decline during the Fed's interest rate cut cycle, a significant amount of funds currently in money market funds may shift towards the US stock or bond markets to seek higher returns; if funds flow into the US stock market, they will directly provide incremental funds, while if they are invested in US bonds, they will push down risk-free interest rates, providing support for US stock valuations. Finally, since May 2025, both the margin loan balances of individual investors and their willingness to allocate to equity assets have shown a significant increase. Therefore, considering multiple dynamic factors in the funding environment, the bank believes that the future flow of funds in the US stock market will remain relatively abundant. Fundamentals: Three key factors support positive US stock performance expectations. The core factors supporting the acceleration of US stock performance in 2025-2026 are the growth momentum in technology and the improvement in the policy environment, easing trade friction. According to LSEG data (as of the end of October 2025), revenue and profit growth expectations for the S&P 500 in 2025 are projected at 5.2% and 6.6% respectively, with tech giants being the core drivers while other sectors show weak upward momentum. Market expectations for 2026 are more optimistic than 2025, with revenue and profit growth expectations for the S&P 500 reaching 7.3% and 15.6% respectively in 2025. The difference in profit and revenue growth rates indicates the market's optimistic outlook on profit margin expansion in the technology sector driven by AI. At the industry level, the information technology and financial sectors are expected to lead growth in 2025, while utilities, materials, and healthcare are also expected to achieve high growth in 2026. Recent upward revisions in earnings expectations are mainly related to AI computing power and non-ferrous resources, while downward revisions are associated with automobiles, aircraft, and petroleum. "The AI Bubble": The extreme narrative of bursting may be difficult to manifest in the short term. On the demand side, the diversified competition between China and the US is driving iterative models and full-stack innovation, with Google Token monthly throughput soaring from 9.7 trillion in April 2024 to 130 billion in October 2025, the bank's neutral assumption predicts a three-fold increase in global monthly Token consumption by the end of 2026 and a 20-fold expansion by 2030 due to the widespread adoption of multimodal and AI intelligent bodies, while the upgrade of chip and system performance continues to reduce unit computing costs, supporting demand release, and there are still bottlenecks in multiple links of the supply chain, so concerns about overcapacity are not yet established. Commercially, there is a disconnect between Token consumption and commercial returns at present, but scenarios like embedded advertising, Agent Commerce, and enterprise solutions are gradually being implemented, driving the industry's transition from "scale growth" to "value growth," with commercial breakthroughs by SaaS vendors likely to be key in the short term. From a funding perspective, global tech giants' combined CAPEX was up 74% year-on-year in Q3 of 2025, with upward guidance, strong cash flows, and policy tax incentives providing funding support. On the risk side, the bank believes that the AI search penetration rate is about to reach its ceiling, with future Token growth dependent on C-end scenarios and Agent landings, debt financing risks concentrated in small and medium-sized cloud service providers, and partnerships between OpenAI and NVIDIA and other ecosystems short-term challenges to be debunked, overall not constituting an industry bubble bursting factor. The potential risks in the US private credit market are expected to impact the banking sector controllably. Since September 2025, Tricolor and First Brands have filed for bankruptcy, raising concerns in the market about the US private credit sector. According to official Fed data, as of the second quarter of 2024, the total size of the US private credit market had reached $1.4 trillion, so if systemic risks were to occur, it could have a significant impact on the financial market. Although default activities in the private credit market slowed down in the first half of 2025, they increased significantly in the second half of the year. However, the overall default rate is still at a moderate level, with no signs of rapid deterioration yet. In terms of risk exposure, large US commercial banks have a relatively high proportion of loans to non-bank financial institutions (NBFIs). However, large commercial banks often have strong independent risk absorption capabilities, and if localized risks in the US private credit market do not escalate into systemic risks in the future, the bank still believes that their impact on the US banking sector is relatively controllable. However, the high-interest rate environment has been ongoing for three years and may impact both the real economy and the financial system. Since Alan Greenspan took over as Fed chairman, a series of regulatory relaxations have led to a period of high-speed "securitization" of the US real economy for about a decade. Therefore, the two economic recessions that occurred in the US in 2000 and 2008 were to some extent caused by the Fed's excessive monetary tightening leading to financial crises, which then transmitted to the real economy, rather than financial crises triggered by a recession in the real economy as in the 1970s and 1980s. The current high-interest rate environment in the US has been ongoing since 2022, and if Powell, in the last half of his tenure at the Fed, ignores potential risks to the real economy and the financial system in the name of "central bank independence", such events may also have a temporary impact on the US stock market. Additionally, for the real economy, residential real estate may also pose a major risk. Even though mortgage rates have fallen against the backdrop of a year of rate cuts in the current cycle, rental and housing price growth rates in the US are rapidly declining. Historically, this phenomenon usually corresponds to a phase where the US real economy is either in or on the verge of a recession. US stock market outlook: Fiscal and monetary easing, a bull market is expected to continue in the midterm election year. The bank believes that with the midterm elections approaching, the US is likely to implement a "fiscal + monetary" dual ease policy in 2026. Amid a positive macro environment in 2026 and expectations of ample incremental liquidity, US stock valuations will be supported, and corporate fundamentals will also be further boosted compared to 2025, favoring a continuation of the bull market in the US stock market in 2026. However, caution is still needed as the Fed may not timely address signs of potential risks in the first half of the year, leading to a temporary correction in the US stock market. As the OBBB Act gradually takes effect, the bank recommends focusing on: 1) the technology sector in the US stock market that is more in line with valuations and performance; 2) manufacturing, upstream resources benefiting from the reindustrialization process and policy support, and energy infrastructure (especially nuclear power); 3) military industry with increased fiscal spending; 4) internet diagnostics benefiting from reduced healthcare expenditures or favorable policies; 5) the financial industry (especially banks) during the interest rate cut cycle. Risk warning: 1) Bursting of the AI bubble in the US technology sector; 2) Fed's delayed response to potential risks in policy direction; 3) Escalation of US-China technology, trade, and financial friction; 4) Increased global geopolitical risks; 5) The privatization of the "two houses" not meeting expectations.