Shenwan Hongyard 2026 Spring US Equities Investment Strategy | "Lift" the Heavy, "Lighten" the Weak, Maintain Hedging

(Source: Shenwan Hongyuan Rongcheng)

Investment Tips for This Period:

Since 2026, the implied medium-term macro and AI investment assumptions in the U.S. stock market have remained relatively stable, with indices oscillating within a narrow range at high levels. However, short-term geopolitical risks and long-term AI disruptions to business models have significantly increased individual stock volatility. 1) Since the beginning of the year, the S&P 500 has fallen 3.3%, with valuation drag of 5.2% and earnings growth contribution of 2%. The Nasdaq has also declined 3.3%, with valuation drag of 7.4% and earnings contribution of 4.4%. 2) Style-wise, value stocks outperform growth stocks; mid-cap and small-cap stocks outperform large caps. Industry-wise, software, financials, and discretionary consumption have led declines, while energy and staples have led gains. 3) Market characteristics show that the average stock volatility is at a high level, higher than index volatility.

Oil price trends are key to medium-term macro and liquidity outlooks. The impact of high oil prices on the U.S. stock market depends on the economic cycle and the Federal Reserve’s response. Historically, during supply shocks that drove oil prices higher, two patterns emerged: stagflation and recession. 1) Stagflation scenarios, like in 1970 and 2022: before oil prices rose, the U.S. economy was overheating, with relatively low baseline interest rates compared to inflation. During the 1970s oil crises, oil prices rose systematically, leading to spiraling wages and inflation, while U.S. corporate profits remained stable but valuations fell sharply. In March 2022, the Fed raised interest rates repeatedly, causing stocks to first fall on valuation concerns, then on earnings. 2) Recession scenarios, like in 1990 and 2008: before oil prices rose, the U.S. economy was already weakening, with the Fed pausing or cutting rates. In 1990, after oil prices peaked and started to decline, the Fed continued to cut rates, with stock market lows coinciding with oil price peaks. In 2008, the Fed kept cutting rates during a year of rising oil prices, while the financial crisis caused persistent weakness. In this cycle, before oil prices rose, the U.S. labor market was fragile, and the Fed was in a rate-cutting cycle. Future scenarios may involve stagflation transitioning into recession and then into rate cuts. The U.S. economy may be approaching the end of a K-shaped recovery, with non-farm employment only increasing by 116,000 in 2025, compared to 4.526 million in 2022. Meanwhile, core inflation components like rent have returned to pre-pandemic levels, and the risks from rising oil prices and Fed rate hikes are not high. Under the constraints of midterm elections, the Trump administration tends to release risks in the first half of the year, with potential turning points in the second half. Historically, the stock market performs weaker in midterm election years, with better performance in the second half.

Overall, due to geopolitical, growth, and corporate asset structure uncertainties, valuation expansion in the U.S. stock market by 2026 is limited. Foreign capital has reduced holdings in U.S. stocks for two consecutive quarters amid geopolitical tensions. Stable growth and liquidity expectations require patience, especially as U.S. stocks shift from light to heavy assets, with asset turnover peaking in Q2 2025 and limited valuation upside. The S&P 500’s earnings growth is expected to be steady at around 16% in 2026, with current dynamic valuations near the 70th percentile, based on earnings digestion as a baseline. Style-wise, corporate capital expenditure is expanding from tech giants to broader industries, with investment-driven sectors outperforming consumer-driven ones. In 2023–2024, capital expenditure in the S&P 500 relies on information technology and communications, while from 2025 onward, growth in industrial, utilities, and energy capital spending bottoms out and begins to recover. Currently, the equity multiplier of the S&P 500 is at a historic low, indicating a shift from cash flow-driven to debt-driven capital expenditure. From a PB-ROE perspective, valuations in industrials, materials, and energy are relatively reasonable. Given ongoing upstream supply tightness, ROE for value stocks is expected to improve through 2026–2027, offering significant allocation opportunities. Tech stocks’ valuations are currently neutral, with Microsoft, Amazon, META, and Nvidia’s forward PE percentiles below 20%.

Regarding AI, upstream segments offer beta opportunities, midstream segments present alpha opportunities, and downstream segments are still in early development. The AI industry currently exhibits manufacturing characteristics, with increasing fixed asset investments centered on data center construction. Homogeneous general AI models are core products, with value concentrated in midstream segments like models and cloud providers. Accelerated free cash flow consumption and rising financing pressures make ROI critical for selecting midstream alpha. In the medium term, profit distribution may extend to both ends of the value chain. Since model inference costs approach the limits of computing power and electricity costs, upstream companies will focus more on cost advantages, with recent net profit margins in chip manufacturing, energy, and power sectors rising sharply and remaining attractive for beta opportunities. Downstream, explosive AI demand will depend on further vertical penetration, characterized by dispersed revenues, relatively low overall value, rapid growth, and high uncertainty. Under the “AI devours everything” narrative, valuations in the software industry have fallen to the 20th percentile. Looking ahead, collaborations between large models and specialized software firms may lead to differentiation rather than indiscriminate selling. Companies with data barriers, user habit accumulation, and regulatory or monopoly advantages may be the first to benefit. Reviewing the stock performance of traditional media like The New York Times since 2000, after rapid valuation declines, profit slumps occurred three years later amid technological concerns. As their business models shifted to dynamic metered pay, subscriptions, and data licensing, stock prices rebounded with profits. Opportunities combining AI with traditional sectors are also noteworthy: 1) The U.S. government’s Genesis Plan will accelerate in 2026, focusing on six key areas from labs to industrial applications: advanced manufacturing, biotechnology, critical materials, nuclear fission and fusion energy, quantum information science, semiconductors, and microelectronics. 2) AI in healthcare: operationally, Anthropic is launching healthcare infrastructure mainly for insurers and providers; OpenAI is developing consumer health navigation; Microsoft’s Copilot Health is already scaled in institutions. 3) AI in financial payments: the payment protocol is shifting from traditional card networks to “smart protocols” supporting AI agents, micro-payments, and high-frequency real-time transactions, with key opportunities in programmable cryptocurrencies and automated payment infrastructure.

Risk Alerts: Upside Risks 1: After the new Fed chair takes office in 2026, if their decision framework emphasizes supporting U.S. manufacturing return and economic transformation, and if they choose to cut rates preemptively ahead of inflation, liquidity improvements could further boost U.S. demand. Upside Risks 2: Breakthroughs in AI in energy or healthcare could lead to nonlinear demand expansion and accelerate productivity revolutions. Downside Risks 1: Accelerated AI-driven productivity gains may not improve production relations, potentially impacting employment by shifting from hiring slowdowns to layoffs, posing significant demand risks. Downside Risks 2: Uncontrolled war risks could keep oil prices high into Q3; if inflation remains above 3%, the valuation center of U.S. stocks could face systemic downward pressure.