Summary

• Towards the end of 2025, although global capital markets experienced significant volatility, stock markets saw a notable gain. The most important factor driving the overall rise in global stock markets this year remains the loose fiscal and monetary policies adopted by countries around the world.

• However, fiscal and monetary easing does not guarantee an improvement in the global economy next year, as their impact on the real economy is gradually weakening. Although China's fiscal policies have boosted outputs, they have not truly resolved the problem of insufficient domestic aggregate demand. At the same time, the sluggish property market has exacerbated the issue of insufficient domestic demand. However, the sustained fiscal and monetary easing has created ample global liquidity and continuous inflow into global stock markets.

• Looking ahead to 2026, the global economy will still face slowdown and severe structural problems, but precisely because of this, the current global fiscal and monetary easing policies are highly likely to remain in place. China's incremental government bond quota is expected to further increase in 2026, approaching around 11% of GDP.

• Global markets in 2026 could face risks from several low-probability factors—including geopolitical issues, growing wealth disparities, and possible AI market bubbles. While these events are unlikely, their potential to create short-term market turbulence makes them important for investors to monitor.

• The US stock market trend is expected to remain strong. Concerns over a potential AI bubble cannot be confirmed in the short term, and capital inflows into U.S. stocks remain robust. Therefore, the overall US stock indices are still likely to rise, though individual stock performance may diverge. We continue to maintain our overall view of a slow bull market for A-shares. In Q4, A-shares are highly probable to remain in a range-trading pattern, and investors should avoid chasing rallies and selling on dips.

• Our positive outlook on base metals and gold is unchanged. Rising AI and data-center investment abroad, as well as domestic investment in energy storage equipment, will continue to benefit from the demand for related base metals such as copper. The prices of metals with limited supply will rise even further.

Previous Views

The economic slowdown is unlikely to disrupt the ongoing “slow bull" trend in the stock market. Once US stocks pull back, it is expected that the US congress will reach an agreement to resolve the risks of a government shutdown. Meanwhile, the overall direction of loose macro policies at home and abroad has not changed. At the same time, the decline in domestic housing prices, the low real economy investment returns, and the downward trend in bank deposit interest rates will continue to drive an increase in the allocation to the stock market. Policymakers have attached greater importance to the rise in stock prices, especially by significantly reducing the supply of new stocks, the biggest driver of the current A-share bull market. At the commodity level, we remain relatively bullish on base metals and gold.

Views in December:

I. Looking Back at the 2025’s Market

By the end of 2025, despite significant volatility in global capital markets, stock markets saw a notable rise. Among them, emerging market stock indices, Hong Kong stocks, and the Nikkei index have all gained more than 25% year-to-date, making them the best-performing indices. Meanwhile, major stock indices such as Germany's DAX, CSI 300, and S&P 500 have also risen by more than 15% (Figure 1). Overall, despite the sharp downturn in April triggered by the Trump administration’s tariff-related trade war, global markets not only recovered their losses but also posted strong rallies. As a result, many countries saw robust gains in their stock indices throughout 2025.

The most important factor behind the overall rise in global stock markets this year remains the accommodative fiscal and monetary policies adopted by countries around the world. Therefore, although the trade war has impacted the global economy, and these impacts persist, we can see that the import tariffs collected by the US each month are still increasing (Figure 2) - the stock market has stopped paying attention to this. Similarly, global economic growth slowed in the second half of 2025, particularly due to a decline in investment in China, the cooling of the US job market, and US government shutdowns, yet global stock markets showed little concern. The main factor driving the sustained optimism in global stock markets since May has remained generally accommodative fiscal and monetary policies worldwide. For example, the Fed has continued cutting interest rates and ended QT, while China has implemented fiscal easing and issued substantial government bonds to stimulate the economy.

Fiscal and monetary easing does not guarantee global economic improvement, as their impact on the real economy has weakened. For example, US fiscal easing is mainly through corporate tax cuts, which are undoubtedly beneficial for top large US corporations. Still, the actual help for most small and medium-sized enterprises (SMEs) and individuals is minimal. Another major trend in the US in 2025 is that large enterprises will invest more in AI-related capex, while continuing to lay off employees and replace human labor with AI and new technologies. Therefore, overall, US fiscal easing has not had a significant boosting effect on overall consumption or the employment market. Moreover, the Trump administration’s tariff increases have pushed up the prices of imported goods. Although the rise has been modest, it has still raised costs for everyday U.S. consumers, particularly low-income households. Thus, current US fiscal policies may indeed benefit large enterprises, but their actual stimulating effect on ordinary people is minimal.

The challenge faced by China's fiscal easing policies, on the other hand, is the inability to create sufficient demand. The government's fiscal expansion focuses more on fostering the development of new industries and high-quality productive forces. Yet it still cannot resolve the problem that many of these new products lack sufficient domestic market demand. As a result, China still struggles to shake off its growing dependence on exports to absorb domestic output. This persistent reliance on exports is reflected not only in China's continuously growing export volume but also in the declining export prices. Due to insufficient domestic demand, export prices remain relatively higher than domestic prices. Therefore, against the backdrop of tariff trade wars, Chinese export enterprises will still choose to lower export prices to gain export market share. Hence, we have seen a relatively obvious decline in China's export price index again since the Trump administration launched the trade war (Figure 3).

From China’s overall domestic demand perspective, the downturn in the property market remains a major obstacle to the recovery of domestic demand. Following the launch of consumption-subsidy stimulus measures last year, domestic consumption showed some improvement, but growth slowed again in the second half of the year. The yoy growth rate of total social retail sales hit an annual high of 6.4% in May but subsequently slowed to 2.9% in October, dropping to less than half its first-half level. The slowdown in domestic consumption growth since the second half of the year is due to two factors: the diminishing marginal impact of consumption-stimulus measures, and the faster decline in domestic property prices, which has further weighed on consumer spending.

As mentioned above, global stock markets saw a notable rise in 2025. However, beneath this rally, the problems in economic fundamentals and the risks of a downturn have not been effectively resolved. The gains in capital markets, especially in equities, are largely driven by factors such as ample liquidity resulting from fiscal and monetary expansion and sustained capital inflows into stock markets.

As an example, the narrowest measure of stock market margin is trading balance. The margin trading balance of A-shares has surged rapidly from 1.85 trillion yuan at the end of last year to the current 2.46 trillion yuan, representing a 33% increase since the start of the year. Similarly, the margin trading balance for US stocks has jumped from $899 billion at the end of last year to $1.18 trillion by the end of October, representing a 32% rise. In other words, even when measured by the narrowest and most direct leverage measurement for stocks, the leveraged capital balances of both A-shares and US stocks have each increased by 1/3 since the beginning of this year. This illustrates the accelerating flow of capital into stock markets amid a broader economic slowdown and increasingly expansionary fiscal and monetary policies. Notably, this shift has become a global phenomenon.

II. Global Dual Fiscal and Monetary Easing is Expected to Continue in 2026

Major countries around the world are still expected to maintain a dual fiscal and monetary easing policy framework in 2026. The primary basis for this judgment is that the real economies of countries globally still face various problems and risks of slowdown. This also means that the loose fiscal and monetary policies of countries around the world are highly unlikely to exist in 2026.

Although some countries are facing inflationary pressures, such as the US and Japan, this is unlikely to break the global overall pattern of dual fiscal and monetary easing in 2026. The reasons are as follows: First, the global economy is currently facing a relatively greater risk of insufficient aggregate demand. The causes of insufficient global aggregate demand include the continuous widening of the wealth gap, both among households and enterprises. While this widening does not cause significant efficiency losses to output, it has an adverse impact on demand. Moreover, as more emerging market countries and their populations join the industrial production process, their demand cannot grow as quickly because of tighter fiscal and monetary conditions and higher borrowing costs. Therefore, they currently appear more as output suppliers in the international division of labor. Overall, the contradiction of insufficient aggregate demand remains more prominent.

Second, the current inflationary pressures in some countries are mainly caused by short-term and local factors. For example, U.S. inflationary pressures are largely driven by higher import tariffs, but these tariff increases are a one-off. Therefore, the impact of this inflationary factor will subside significantly in the second half of next year and will not generate a sustained self-inducing inflationary cycle. Japan's inflation is mainly driven by the depreciation of the yen and rising domestic food prices, and Japan’s overall wage growth rate has also accelerated. Therefore, the Japanese government will not change its relatively loose fiscal policy stance just because of inflation. Shortly after the Sanae Takaichi government took office, it announced a new fiscal stimulus package of 21 trillion yen, which has laid the foundation for the re-loosening of Japan's fiscal policy next year. The rapid expansion of global AI investment, which increasingly substitutes labor in developed countries, may further weaken employment and income growth for ordinary households. This will also make the overall household consumption demand face the risk of further slowdown without further fiscal support. Therefore, we believe that if the pace of AI replacing labor accelerates further, major developed countries around the world will have to increase fiscal stimulus efforts, especially by directly increasing household incomes through fiscal subsidies to stabilize domestic demand.

The situation is similar in China, where consumption, and investment remain subdued and the property market has not shown signs of recovery. Therefore, it can be predicted that China's dual fiscal and monetary easing policy framework will not allow an exit in 2026. For China's policymakers, the current focus is certainly not on changing the intensity of policy easing, but how to more effectively utilize the fiscal and monetary policies to better address the problem of insufficient domestic demand. Regarding this issue, it is still difficult to judge whether the direction of domestic fiscal and monetary policies next year will be sufficient to reverse the current sluggish state of domestic demand and the property market. But one thing is almost certain: the actively expansionary fiscal and monetary policies will not be able to exit quickly. For the overall stock market index, this alone can basically ensure that the overall market still has further upside room. The effectiveness of policies will mostly determine only the magnitude of market gains and the priority of performance across various stock sectors in the market.

The Chinese government may still maintain a fiscal deficit rate of approximately 4%. China's incremental fiscal stimulus will be achieved primarily by increasing the quotas for special treasury bonds and local government special project bonds. Therefore, China's incremental government debt quota is a more effective way to project the actual magnitude of China's fiscal expansion. By the end of November, the total amount of incremental government bonds issued in China this year reached 13.25 trillion yuan (Figure 6), a significant increase from last year’s total of 11.38 trillion yuan. It is estimated that the total increase in government liabilities for the whole year will be approximately 13.9 trillion yuan. We expect that the increment of China's government bonds in 2026 to be close to 15 trillion yuan, about 11% of China's current GDP of 140 trillion yuan.

While fiscal policy remains expansionary, domestic monetary policy is also expected to maintain an accommodative stance. Due to the pressures faced by banks such as narrowing interest margins and rising non-performing loans, further reserve requirement ratio (RRR) cuts and potential increases in the central bank bond purchases are possible monetary easing choices that may be adopted in the future. Meanwhile, as the Fed further cuts rates, the policy interest rate spread between China and the US will narrow, easing pressure on the CNY exchange rate and helping the People's Bank of China implement more accommodative monetary policies in 2026.

In summary, we remain optimistic about global stock market trends in 2026.

III. Potential Market Risks in 2026

First, we do not expect an economic growth slowdown to pose significant risks to the stock market next year. This is because market participants currently do not hold overly optimistic expectations for economic fundamentals in the first place; on the contrary, they believe that slower economic growth will prompt policymakers of various countries to adopt more accommodative fiscal and monetary policies, which in turn is more likely to be conducive to stock price increases. Therefore, the economic growth slowdown itself is not a market risk. However, it is necessary to pay attention to factors that the market may not fully anticipate but could trigger significant unexpected downward economic risks, such as geopolitical risks or a sudden outbreak of a financial crisis. Nevertheless, investors still need to keep an eye on these low-probability risks.

Which low-probability risk events are worthy of attention? The rapid widening of the global wealth gap and the continuous concentration of resources and wealth among leading enterprises and a small number of ultra-high-net-worth individuals, have increased the probability of outbreaks of both international geopolitical conflicts and domestic social turbulence in some countries. At the same time, the rapid growth and promotion of AI technology development and investment may introduce two distinct types of risks. The first risk concerns a potential investment bubble, where large-scale capex leads to a short-term surge in redundant and excessive inputs that fail to generate sufficient cash flow returns, or in which only a handful of leading winning enterprises capture the vast majority of returns, while the investments of the rest of the companies incur huge losses. The potential outcomes could disrupt financial markets. Many market participants believe that even if this risk is real, it won’t show up in 2026 and will only appear years later. On the one hand, this has accelerated R&D and the promotion of new technologies. For instance, the adoption of AI is proceeding much faster than that of any previous technology. However, it could also significantly advance the timing of a bubble burst. Moreover, the current high valuations across financial markets and the extremely optimistic expectations for AI may also be a source of substantial market volatility in the future.

The second risk associated with AI technology is the potential for a rapid contraction in the job market as AI adoption accelerates. Although fiscal expansion policies aim to offset this risk, traditional economics offers no answers to questions such as the required scale of fiscal stimulus and how to effectively mitigate the employment impact risks brought by AI. This is because the pace of technological progress has always been far ahead of that of social systems and economic research. As a result, this period may give rise to certain social and economic dislocations, leading to considerable economic and market risks.

Overall, we remain optimistic about the trend of global stock markets in 2026 including the chance of a rapidly forming market bubble. However, investors should remain optimistic about the risks of potential low-probability events.

IV. Market Strategy

US stock market trends are expected to remain strong. The end of the US government shutdown and further interest rate cuts by the Fed will continue to boost investor sentiment toward US equities. Concerns about an AI bubble cannot be verified in the short term, and the overall trend of capital inflows into US stocks remains unchanged. Therefore, the overall US stock indices are still likely to rise, though individual stock performance may diverge.

We continue to maintain our overall view of a slow bull market for A-shares. In Q4, A-shares are likely to remain in a range-bound trading pattern, and investors should avoid chasing rallies and selling into dips. On the contrary, if stock indices decline sharply, it could provide a good buying opportunity for investors preparing for 2026.

We have been bullish on base metals and gold, and this view remains unchanged. Overseas investment in AI capex and data centers, as well as domestic investment in energy storage equipment, will continue to benefit from the demand for related base metals such as copper. The prices of metals with limited supply growth will perform even more prominently.