Morgan Stanley Sees a Tamer China Stock Rally in 2026 After Sizzling Gains

Morgan Stanley has dramatically shifted its tone on Chinese stocks earlier this year, moving from a bearish posture to a more balanced “equal-weight” allocation. The firm raised its year-end targets for several key indices, including the MSCI China, Hang Seng, and CSI 300, citing stronger fourth-quarter earnings, improvements in macro conditions, and a more stable foreign-exchange outlook. Shifting fundamentals, particularly around corporate discipline and returns on equity, are now underpinning its more bullish stance.

However, Morgan Stanley is now warning that while the rally is likely to continue, it may not mirror the explosive gains seen recently. The bank believes valuation expansion will slow, especially after a period of rapid re-pricing. The magnitude of further upside could be constrained as investors weigh the current momentum against lingering macro risks, regulatory uncertainty, and potential profit-taking pressures.

The bank also emphasizes that technology-driven themes, especially around AI, are shaping its positive view, but cautions that not all sectors will benefit equally. While companies in innovation-led fields may sustain growth, more traditional or cyclical businesses could face headwinds if market sentiment shifts or if capital rotates out of riskier names. The quality of earnings and return on equity trends remain critical for sustaining valuation support.

For global and domestic investors, Morgan Stanley’s message is one of disciplined optimism. Chinese equities still offer compelling structural opportunities, especially in technology and value-creation enterprises, but the days of unchecked exuberance may be giving way to a more nuanced phase of consolidation and selective investment.